Tag Archives: currency wars

G20 to avoid devaluing currency, draft statement says

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Group of 20 nations will affirm a commitment to avoid weakening their currencies to gain a trade advantage, according to a draft statement prepared for a meeting this week in Washington, Bloomberg BNA reported.

The statement, seen by a Bloomberg BNA reporter, maintains a February pledge to “move more rapidly toward more market-determined exchange rate systems and exchange-rate flexibility” and to refrain from competitive devaluations. Meetings of finance ministers and central bankers start Thursday.

The initial language suggests G20 members will withhold direct criticism of Japan’s efforts to rally its economy from 15 years of deflation even after the yen’s 19% slide against the dollar in the past six months. Yi Gang, a People’s Bank of China deputy governor, said Wednesday that the yuan’s trading band will be widened “in the near future,” a comment that Credit Suisse Group AG said was for a political audience.

Japanese Prime Minister Shinzo Abe’s campaign to end deflation “always carries the risk of triggering criticism from trading partners and it remains a balancing act warranting careful handling,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former Bank of Japan official. “So far, he’s succeeded in the challenge, though there is still a way to go.”

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Japan’s Easing

The G20 talks will be the first since the Bank of Japan announced record monetary easing. The BOJ plans to purchase 7.5-trillion yen (US$76-billion) of bonds a month and double the monetary base in two years, the central bank said April 4. U.S. Treasury Secretary Jacob J. Lew and Bank of Canada Governor Mark Carney this week signalled support for Japan’s stimulus.

A first-draft communique describes the global outlook as “generally somewhat weaker and uneven” with “unbalanced” recoveries between advanced economies and emerging markets.

The yen has dropped about 5% against the U.S. dollar since the day before the BOJ announcement, the biggest slide among 16 major currencies and more than three times as fast as the drop in the Australian dollar, the second-worst performer. Japan’s yen has declined by at least 2% against all of the more than 150 currencies Bloomberg tracks worldwide.

G20 Goals

Lew Wednesday urged G20 officials to maintain a pledge to refrain from influencing exchange rates at the expense of other countries, saying Japan’s recent policies align with the pact. Carney also said that Japan’s measures are consistent with the G20’s goals and are positive for Canada’s economy.

The BOJ has “clearly innovated,” International Monetary Fund Managing Director Christine Lagarde said in an interview Thursday on Bloomberg Television.

The exchange rate of China’s yuan “is going to be more market-oriented,” Yi said Wednesday at an IMF conference in Washington. “Last year, they increased the floating band from 0.5% to 1%. I think in the near future they’re going to increase the floating band even further.”

While such a move would be part of building the “infrastructure” for China’s currency to eventually have a bigger global role, the timing of the comment indicated it was for a political audience — the U.S. Congress, said Tao Dong, a Credit Suisse economist in Hong Kong.

G20 officials gathering in the next two days will discuss the draft statement and changes may be made before its release.

Global Outlook

“Fiscal drag, policy uncertainty, impaired credit intermediation, private deleveraging, and an incomplete rebalancing of global demand continue to weigh on global growth prospects,” the draft says. The U.S. and Japan will be asked to set out “credible” plans for medium-term fiscal consolidation, while acknowledging that scope exists in the U.S. to “provide more support for economic recovery.”

Euro-area countries will be asked to move more quickly toward a banking union.

On financial regulation, the draft text calls for further steps by G20 members to introduce resolution regimes for winding down faltering “too-big-to-fail” banks without triggering fiscal instability or taxpayer-financed bailouts.

The text also calls on the Financial Stability Board to lead reforms concerning short-term interest-rate benchmarks and to submit a status report to the G20 leaders’ summit in St. Petersburg, Russia, in September on steps to reduce reliance on credit-rating companies.

G20 members are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S.

Bloomberg News

Currency wars less of an issue for G20, Canadian finance official says

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OTTAWA — Finance officials from the world’s leading economies will be less focused on “currency wars” at meetings this week despite recent attention on Japan’s aggressive monetary policy, according to a senior Canadian finance official on Tuesday.

Asked how finance ministers and central bankers from the Group of 20 advanced and emerging economies would react to Japan’s massive bond-buying scheme and the impact on its currency, the official suggested exchange rate issues were not as hot an agenda item as they were at the last meeting in Moscow in February.

The G20 meeting takes place in Washington on Thursday and Friday.

There continues to be a need for coordinated exchange rate adjustment to foster a stronger economic recovery, the official said, without naming any countries. He spoke on the condition he not be named or quoted.

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Canada supports Japan’s actions to kickstart its economy and the G20 more broadly seeks to ensure all countries’ policies target their domestic economies and not foreign exchange rates to gain a competitive advantage.

The United States, on the other hand, put Japan on notice last week that it was watching its economic policies to ensure they were not aimed at devaluing the yen.

The Bank of Japan launched a massive bond-buying program earlier this month to try to shock its economy out of stagnation. The policy sharply undercut the value of the yen and Japanese officials made some comments last year that suggested they might be targeting a weaker yen.

G20 finance officials may also touch on the surprising drop in gold prices in their talks, but only as part of broader assessment of the overall outlook for financial markets and the global economy, the official said.

That discussion will include the implications of the Cyprus crisis on asset prices and a prognosis of where those prices are headed, he said.

There is no agreement yet on another big area of coordinated policies — reducing public debt.

G20 members agree on the need to strengthen their commitment to cut deficits and debt beyond 2016 but have not reached an agreement on the details of such a pledge that would reflect each country’s specific circumstances, the official said.

One question in the talks is whether the Europeans’ own target of cutting their debt to 60% of gross domestic product could be applied to all, he said.

Canada and India co-chair the committee on the framework for growth, which is responsible for this issue.

According to a document obtained by Reuters, the co-chairs put forth a proposal for discussion at the upcoming meeting that would see countries agreeing to cut their public debt to well below 90% of gross domestic product in the longer term.

But the official stressed that there were a range of options on the table and none of them had been endorsed by anyone in particular.

G20 currency war promises unlikely to end devaluation debate

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MOSCOW – Financial leaders from the world’s 20 biggest economies may have promised not to devalue their currencies to help exports, but the pledge will do little to keep exchange rates stable.

While G20 finance ministers and central bank governors can promise not to devalue their currencies directly, there can be no guarantees while central banks are pumping money into economies to make them grow again.

“We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes,” the G20 financial leaders said in a closing statement after meeting in Moscow on Friday and Saturday.

But it is precisely the ultra-loose monetary policy of the U.S. Federal Reserve or Bank of Japan, aimed at helping their domestic economies to grow, that depressed the dollar and the yen and sparked the whole competitive devaluation debate.

That trend is unlikely to change, something China and other key emerging markets were quick to warn against in Moscow.

Fed chief Ben Bernanke said on Friday that “the United States was using domestic policy tools to advance domestic objectives.”

Tokyo in turn insists that the Bank of Japan’s pledge to start buying unlimited amounts government bonds is purely to help its shrinking economy get out of recession.

The G20 agreed there was nothing wrong with such policies.

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But a devaluation of a currency, whether deliberate or just a side-effect of monetary policy, is still a devaluation. Calling it competitive or otherwise just labels the intent behind the move.

Finance Minister Jim Flaherty, asked after the G20 talks how to distinguish whether monetary policy was aimed at boosting the economy or specifically targeting the exchange rate said: “It’s quite difficult to gauge that.”

While Japan has insisted that neither this week’s G7 or G20 currency statements required it to change policy tack in any way, anonymous briefing after the former said Tokyo was squarely being targeted.

Perhaps what riled the Group of Seven rich powers in particular is not Japan’s policy slate, which could bolster world economic recovery, but statements by some Japanese officials targeting specific levels for the yen.

Yuri Kadobnov/AFP/Getty Images
Yuri Kadobnov/AFP/Getty ImagesFinance Minister Jim Flaherty, right, and Mark Carney, Governor of the Bank of Canada, attend a G20 meeting in Moscow.

“The market will take the G20 statement as an approval for what it has been doing — selling of the yen,” said Neil Mellor, currency strategist at Bank of New York Mellon in London. “No censure of Japan means they will be off to the money printing presses.”

G20 agreement that financial markets should set the exchange rate of a currency offers no relief to countries like Brazil whose relatively high interest rates attract capital from low interest-rate countries like the United States, putting upward pressure on its currency and making its exports more expensive.

European Central Bank Vice-President Vitor Constancio indicated the G20 pledge on avoiding competitive devaluations had more to do with the speed of exchange rate fluctuations.

“It all has to do with the avoidance of too abrupt movements in the exchange rate and keeping the exchange rate moving in just in one direction — that would of course raise questions and would have to be discussed,” Constancio told a news conference after the talks.

While G20 officials played down talk of “currency wars” — a term coined by Brazil — and International Monetary Fund head Christine Lagarde said they were more “currency worries”, officials privately say they expect exchange rates to return to be on the agenda for many meetings to come.

“The G20 must consult permanently on what is happening in exchange rates, because it is a point of common interest. Any disorderly movements have to be discussed,” Constancio said.

© Thomson Reuters 2013

‘Inappropriate, fruitless and self-defeating’ sparring over currency divides G20 summit before it begins

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MOSCOW — G20 officials struggled to find a common form of words on currency manipulation ahead of a summit on Friday at which divisions within the group over growth versus austerity looked set to flare back into life.

The head of the European Central Bank criticised wrangling over currencies ahead of the meeting of Group of 20 financial leaders where Japan is expected to escape any censure for its expansionary policies.

Speaking in Moscow, ECB President Mario Draghi said recent sparring over currencies was “inappropriate, fruitless and self-defeating” and U.S. Treasury official Lael Brainard warned against “loose talk”.

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Draghi also said the euro’s exchange rate was in line with long-term averages, suggesting little alarm yet about its recent climb choking off prospects of economic recovery.

The currency market was thrown into turmoil this week after the Group of Seven powers – the United States, Japan, Germany, Britain, France, Canada and Italy – issued a joint statement stating that domestic economic policies must not be used to target currencies.

Tokyo said that reflected agreement that its aggressive monetary and fiscal policies were appropriate but the show of unity was shattered by off-the-record briefings critical of Japan.

A meeting in Moscow of finance officials from the G20 nations, which account for 90% of the world’s gross domestic product and two-thirds of its population, looked likely to be dominated by Japan’s expansive policies that have driven down the value of the yen.

But there appeared to be no consensus to demand any action, not least because others such as the United States have also printed money at a furious rate.

Host Russia’s finance “sherpa”, Deputy Finance Minister Sergei Storchak, said the drafting discussion was proving difficult, but the final text would not single out Japan for criticism.

“There is no competitive devaluation, there are no currency wars,” Storchak told reporters. “What’s happening is market reaction to exclusively internal decision making.”

Australian Treasurer Wayne Swan indicated support for Japan’s monetary policy saying “everybody’s got a stake” in its ability to foster growth.

And Indonesia, one of the rising Asia-Pacific economies, said it was also less concerned about the exchange rate of the yen than about Japanese growth.

“If the Japanese increase their domestic demand it will help Indonesia, especially from the export side,” said Hartadi Sarwono, deputy central bank governor.

GROWTH VS AUSTERITY

A row was also brewing between Europe and the United States over extending a promise to reduce budget deficits beyond 2016. A pact struck in Toronto in 2010 will expire this year if leaders fail to agree to extend it at a G20 summit of leaders in St Petersburg in September.

The G20 put together a huge financial backstop to halt a market meltdown in 2009 but has failed to reach those heights since. At successive meetings, Germany has pressed the United States and others to do more to tackle their debts. Washington in turn has urged Berlin to do more to increase demand.

“It’s very important to calibrate the pace of fiscal consolidation,” Brainard, the U.S. Treasury Secretary, said. “It’s … important to see demand in the euro area and some of that must take place through internal rebalancing.”

The United States, G20 delegation sources said, was blocking attempts to agree on a fresh commitment to cut borrowing, a position that reflects Washington’s focus on running expansive policies until unemployment comes down.

The eurozone’s largest economy, Germany, and the European Central Bank, want a new borrowing pledge – in line with their own tough medicine for the currency bloc’s ailing periphery.

A European Union position paper set out the dispute in stark terms. It said the United States “was not ready to commit to a … numerical target”.

“The EU considers it essential to agree credible and ambitious targets,” said the document, obtained by Reuters.

Japan’s embrace of ’Abenomics’ — named after new Japanese premier Shinzo Abe — entails a huge round of fiscal and monetary expansion aimed at raising the inflation rate to 2%.

The yen has fallen by around 20% since November. But it hit a two-week high against the euro on Friday on speculation the next Bank of Japan governor may be less inclined to pursue aggressive monetary easing and as markets awaited for the G20 summit to pronounce.

Bank of Japan Governor Masaaki Shirakawa said he would defend Tokyo’s bold approach to monetary easing, saying the policies were aimed at stabilising the domestic economy. He also said the bout of yen weakness merely reflected receding risk aversion among investors globally.

One senior G20 source said late on Thursday that there would be no separate statement on currencies. A passage would be inserted into the main communique, but it would not repeat the G7 line that “we will not target exchange rates”.

This, the source said, would not be acceptable to China – which is now the world’s second-largest economy and holds much of its US$3.3 trillion in foreign reserves in U.S. Treasury bonds.

Russian officials note that Japan has not intervened on currency markets to weaken the yen, suggesting that Tokyo would not be singled out as a miscreant.

© Thomson Reuters 2013