G7 Ministers Set to Meet Over Currency

Inquiring minds are reading about the impending currency wars and how the G7 Ministers are trying to avert it:

Finance ministers from the G7 will hold an informal meeting in Washington this week to discuss growing concerns that the world is in the grip of an “international currency war” as government’s manipulate their currencies to bolster exports.

The meeting on Friday, on the sidelines of the annual International Monetary Fund gathering, comes amid rising tensions between the western industrialised nations and China, whose prime minister, Wen Jiabao, is on a charm offensive in Europe this week.

In separate moves designed to weaken currencies, the Bank of Japan reinstated its zero interest rate policy and pledged to buy ¥5tn ($60bn) of assets, while Brazil doubled a tax on foreign investors buying local bonds to put a lid on a recent rally in its currency, the real. It was Brazil’s finance minister, Guido Mantega, who coined the “international currency war” phrase last week, following a series of interventions by central banks in Japan, South Korea, Switzerland and Taiwan to make their currencies cheaper.

The concerns about currency manipulation have been heightened by the global recession, with many countries, including Britain, seeing a growth in exports as the means to recovery. A weaker currency means a country’s exports become more competitive.

The Bank of Japan set its interest rate target to a range of zero to 0.1%, returning to zero rates for the first time in more than four years and underlining worries about the Japanese economy, which is beset by falling prices. Japanese officials intervened in the currency markets last month to weaken the yen, but the impact was only short-lived. “The pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation,” the bank said.

Before the IMF meeting, the Institute of International Finance, an industry group representing some of the world’s largest banks, urged action. In a letter to the IMF, Charles Dallara, the banking lobby’s managing director, called today for greater co-operation. “Urgent action is needed to arrest the disturbing trend towards unilateral moves on macroeconomic, trade and currency issues,” he said.

This is the type of ‘forgotten’ item economists miss when analyzing the future. Miss a few more and it is easy to see why predictions can be so wrong.


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