G20 against the use of exchange rates as weapons

Are we running towards an international “currency war”? This topic has become a major concern as countries more and more manipulate the value of currencies to their advantage without any concern about the influence on the world economy.                                                

The threat of a “currency war” was also a major topic at yesterday’s meeting of global finance ministers and central bankers from the 20 leading nations in South Korea. It was a two-day meeting in preparation for a summit of the G20 heads of government in Seoul in the middle of November this year. As this is a hot topic of today’s news I found some interesting articles about the background and outcomes of the meeting that I would like to share and discuss.

What influenced the deliberate intervention in exchange rate values? One reason for currency manipulations and global tensions is the global imbalance and shift of powers between nations. This development, however, is not noticeable in exchange rate developments. China, for instance, has become second in world leading economies but has kept their currency very low in value in order to maintain an advantage on exports. On the other hand, emerging markets such as China complain about an enormous inflow of capital. Due to low-interest rates and the creation of liquidity by the Federal Reserve the USA spurred a flow of capital out of the US towards emerging markets in Asia and Latin America were investors saw higher returns. This tends to push their currencies higher and thus undermines competitiveness. As a consequence Brazil wants to put taxes and tariffs on capital inflow and Japan also sold its currency in order to decrease in value.

As it can be seen actions of one central bank can set of disputes in other parts of the world and therefore I think it is important for the G20 to come up with a strong resolution.

The U.S. Treasury Secretary Timothy Geithner also points out after yesterday’s meeting “I think it’s fair to say for the first time we see the major economies come together and recognize that excess imbalances that persist over a period of time, that can threaten growth and financial stability, need to bring about adjustments in policies.”, as stated in yesterday’s article about the G20 meeting in the Associated Press.

According to Walker (BBC News) the ministers agreed to omit “competitive devaluations of their currencies” and move towards a “more market-determined exchange rate system. No targets, however, were defined for the change in the devaluations and so countries like China will reform its currency policy rather gradually than immediately. Walker also mentions that it is even possible that the dollar will lose even more in value over the next weeks as the Federal Reserve is still “boosting the US money supply”.

Despite no defined resolution ministers agreed that the International Monetary Fund (IMF) will have the duty to supervise and ensure that countries with high imbalances have to undergo an assessment thus putting pressure on economies as reported by Oliver in the Financial Times.

As no targets and definite numbers were set the question remains: Is there an adequate solution to the problem? Could regulations prevent a currency war or will countries not rather continue with their selfish behavior to strengthen their own economy? The history shows countries pretend unity but agreements sometimes don’t even last long. I think if economies continue to deliberately devaluate their currencies the world economy will eventually end up in a chaos. Therefore, serious actions are required to avoid another economic downturn. The agreement was definitely a first step but not the final say. Let’s see what the outcome of the G20 meeting in mid November will be.