Finance ministers stand ground in growing currency spat (3rd Roundup)

By Chris Cermak Oct 9, 2010, 1:18 GMT

Washington - The world's finance ministers and central bankers appeared to stoke the fires in a currency dispute as they gathered this weekend for annual meetings of the International Monetary Fund (IMF) and World Bank.

The United States, Europe and emerging powers like China faced off in Washington over the value of their currencies and the effects on the world's fragile and uneven recovery from recession. A deal over the weekend appeared increasingly unlikely.

'I certainly don't anticipate there's going to be any unanimous agreement in Washington this weekend on currency,' Canadian Finance Minister Jim Flaherty told reporters late Friday.

Ministers from the Group of 20, a bloc of major industrial and emerging economies, held a closed-door session earlier Friday on the sidelines of the main meetings.

The smaller Group of Seven (G7) industrial nations held a working dinner Friday evening, and talks were to continue Saturday through the steering committees of the IMF and World Bank.

While there was some 'international will' to solve the currency row, Flaherty warned that governments appeared headed for the kinds of 'protectionist measures' they had promised to avoid during a series of G20 summits at the height of last year's global recession.

Without mentioning China by name, US Treasury Secretary Timothy Geithner said that the global economic recovery was being 'undermined' by emerging powers that would not let their currencies rise and allow a broader rebalancing of the economy to take place.

China's central bank head Zhou Xiaohuan countered that a 'shock therapy' approach to the Chinese yuan would be dangerous. He promised a gradual rise in the yuan, which the US and Europe consider significantly undervalued.

European officials voiced concern this week that the euro is too strong against the dollar. Japanese Finance Minister Yoshihiko Noda, whose government has already intervened twice to weaken its currency, vowed to continue dealing with all 'downside economic risks' to its own weak recovery, including the 'strong yen.'

The debate over exchange rates has been fuelled by an increasing unevenness in the global economy as it recovers from last year's recession. Emerging Asian and Latin American powers have pulled out of the crisis with strong growth, while the US, Europe and Japan face weak recoveries and limited fiscal space to boost their economies.

IMF Managing Director Dominique Strauss-Kahn urged all sides to step back from the talk of a 'currency war,' as he opened the annual gathering in Washington on Friday. He urged governments to stop using their currencies 'as weapons.'

'History has shown us that's not a solution,' Strauss-Kahn said. 'What we need is more cooperation on the monetary side and on the international system.'

The US was put under further pressure Friday as new jobless figures showed unemployment stayed level at 9.6 per cent in September. The IMF has predicted that US and eurozone will both face jobless rates of near 10 per cent through 2011.

Geithner said the global recovery was 'at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in countries running external surpluses, and by the extent of foreign exchange intervention as countries with undervalued currencies lean against appreciation.'

But Brazilian Finance Minister Guido Mantega said wealthy nations should not expect to use the rebound in emerging powers as a means of reviving their own sagging economies. He urged US and European governments to find ways to bolster public spending instead.

The Group of 24, a bloc of developing countries, on Thursday blamed record low interest rates in rich nations for provoking a dangerous flood of investment into their economies and driving up the value of their currencies.

French Finance Minister Christine Lagarde said the currency row would not be solved 'overnight.' But she urged cooler heads to prevail, calling for 'a climate of cooperation and confidence, not a climate of disruption, volatility and war.'

Other European officials have been sounding fears that a strengthening euro, which neared 1.4 dollars this week, will push down exports at a time when their economies remain fragile.

'More than ever, exchange rates should reflect economic fundamentals,' European Central Bank head Jean-Claude Trichet said Thursday.

Chris Turner of ING Commercial Banking said eurozone officials were beginning to 'see the writing on the wall.' A weak US economy, coupled with emerging markets holding down their currencies, was pushing up the value of the euro.