Global policymakers clash on currency policies

Thursday, 7 October 2010 23:06 - - {{hitsCtrl.values.hits}}

NEW YORK (Reuters) - Global policymakers clashed over exchange rates on Wednesday as Western leaders warned China and other emerging markets that simultaneous efforts to weaken their currencies could derail economic recovery.

U.S. Treasury Secretary Timothy Geithner said countries with large trade surpluses must let their currencies rise lest they trigger a devastating round of competitive devaluations.

“When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same,” Geithner said Wednesday ahead of the weekend’s semi-annual international Monetary Fund meeting.

Officials around the world fear such a “race to the bottom” will trigger trade tariffs and other measures that damage global economic growth.

Using exchange rates “as a policy weapon” to undercut other economies and boost a country’s own exporters “would represent a very serious risk to the global recovery,” IMF Managing Director Dominique Strauss-Kahn was quoted as saying in Wednesday’s edition of the Financial Times.

But China, which the West accuses of keeping the yuan artificially weak to promote exports, has rebuffed such calls. On Wednesday, Premier Wen Jiabao told the European Union to stop piling pressure on Beijing to revalue the yuan, saying a rapid exchange rate shift could unleash disastrous social turmoil in China.

“Many of our exporting companies would have to close down, migrant workers would have to return to their villages,” Wen said during a visit to Brussels. “If China saw social and economic turbulence, then it would be a disaster for the world.”

The expectation that the Federal Reserve will expand the U.S. money supply again, lowering short term U.S. Treasury yields even further, has weighed on the U.S. dollar pushing the euro, yen and other emerging market currencies higher in recent months forcing some governments to take action.

The global exchange rate system and the issue of rebalancing world economic growth will likely be at the top of the agenda at the IMF meeting this weekend and at Friday’s gathering of finance leaders from the Group of 20 economies.