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G-20 OFFICIALS SAY CURRENCIES REFLECT ECONOMIC TRENDS, NOT WAR
Global finance chiefs dismissed speculation the world is sliding toward a 1930s-style round of currency devaluations, indicating their acceptance of the dollar’s recent surge and declines in the euro and the yen.
As talks of finance ministers and central bankers from the Group of 20 got under way in Istanbul, U.S. and European officials said recent exchange-rate fluctuations mirrored trends in economies rather than outright efforts to secure a competitive advantage to boost growth.
“The big currencies are realigning to better reflect fundamentals,” Italian Finance Minister Pier Carlo Padoan said in an interview. U.S. Treasury Secretary Jacob J. Lew told CNBC that recent moves show how the U.S. is “stronger than a lot of the economies that we compete with.”
More than a dozen interest-rate cuts since the year began, as well as the European Central Bank’s embrace of bond buying fanned speculation among investors that some economies are seeking to boost growth and inflation by encouraging weaker exchange rates.
A cheaper currency tends to boost a nation’s exports while making import prices more expensive, often to the detriment of trade partners. The concern is that those losing out then retaliate, tripping off a round of devaluations which end up damaging the world economy in a cycle reminiscent of the 1930s trade war.
Monetary Easing
“We are not observing competitive devaluations, but broad-based monetary easing, which is a positive sum game, even if the returns to easing are diminishing,” said Jens Nordvig, managing director of currency research at Nomura Holdings Inc. In New York.
The U.S. dollar has gained 16 percent on a trade-weighted basis over the past year as the American economy strengthened and bets increased that the U.S. Federal Reserve will soon raise interest rates for the first time since 2006.
The greenback’s rise has already reduced earnings at American companies from Procter & Gamble Co. to Pfizer Inc., while drawing warnings from Nobel laureate Paul Krugman and billionaire Warren Buffett that it could slow the U.S. expansion.
By contrast, weakness in the economies of the euro-area and Japan prompted their central banks to increase monetary stimulus, forcing the euro down 17 percent against the dollar and the yen 14 percent.
‘Resist Protectionism’
“Sometimes an accommodative monetary policy might be interpreted as currency manipulation, but it might not be anything of the kind,” Canadian Finance Minister Joe Oliver said in an interview. “It might just be a response to the domestic economic situation.”
The view that acting in the interest of an economy is not currency war-mongering is likely to carry the day when the G-20 releases a communique at the end of its meeting on Tuesday.
“We will stick to our previous exchange rate commitments and will resist protectionism,” said a draft of that statement obtained by Bloomberg News. Bank of Japan Governor Haruhiko Kuroda said currency depreciation isn’t on the agenda of the two-day meeting.
Since a meeting two years ago in Moscow, the G-20 has frequently committed to refraining from targeting “exchange rates for competitive purposes.”
There will still be demands for laggards in the world economy to spur demand.
“Growth in the global economy remains uneven and the recovery is in progress, yet slow, especially in some advanced economies, notably the euro area and Japan,” the draft said.
For Lew, the U.S. Treasury Secretary, the “real challenge is getting other economies to get back in the growth pattern where they’re doing better,” he told CNBC.
To do so, officials will also say monetary policy needs to stay accommodative until the outlook improves and that when settings are changed they should be “carefully calibrated and clearly communicated to minimize negative spillovers,” the draft said.
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Global finance chiefs dismissed speculation the world is sliding toward a 1930s-style round of currency devaluations, indicating their acceptance of the dollar’s recent surge and declines in the euro and the yen.
As talks of finance ministers and central bankers from the Group of 20 got under way in Istanbul, U.S. and European officials said recent exchange-rate fluctuations mirrored trends in economies rather than outright efforts to secure a competitive advantage to boost growth.
“The big currencies are realigning to better reflect fundamentals,” Italian Finance Minister Pier Carlo Padoan said in an interview. U.S. Treasury Secretary Jacob J. Lew told CNBC that recent moves show how the U.S. is “stronger than a lot of the economies that we compete with.”
More than a dozen interest-rate cuts since the year began, as well as the European Central Bank’s embrace of bond buying fanned speculation among investors that some economies are seeking to boost growth and inflation by encouraging weaker exchange rates.
A cheaper currency tends to boost a nation’s exports while making import prices more expensive, often to the detriment of trade partners. The concern is that those losing out then retaliate, tripping off a round of devaluations which end up damaging the world economy in a cycle reminiscent of the 1930s trade war.
Monetary Easing
“We are not observing competitive devaluations, but broad-based monetary easing, which is a positive sum game, even if the returns to easing are diminishing,” said Jens Nordvig, managing director of currency research at Nomura Holdings Inc. In New York.
The U.S. dollar has gained 16 percent on a trade-weighted basis over the past year as the American economy strengthened and bets increased that the U.S. Federal Reserve will soon raise interest rates for the first time since 2006.
The greenback’s rise has already reduced earnings at American companies from Procter & Gamble Co. to Pfizer Inc., while drawing warnings from Nobel laureate Paul Krugman and billionaire Warren Buffett that it could slow the U.S. expansion.
By contrast, weakness in the economies of the euro-area and Japan prompted their central banks to increase monetary stimulus, forcing the euro down 17 percent against the dollar and the yen 14 percent.
‘Resist Protectionism’
“Sometimes an accommodative monetary policy might be interpreted as currency manipulation, but it might not be anything of the kind,” Canadian Finance Minister Joe Oliver said in an interview. “It might just be a response to the domestic economic situation.”
The view that acting in the interest of an economy is not currency war-mongering is likely to carry the day when the G-20 releases a communique at the end of its meeting on Tuesday.
“We will stick to our previous exchange rate commitments and will resist protectionism,” said a draft of that statement obtained by Bloomberg News. Bank of Japan Governor Haruhiko Kuroda said currency depreciation isn’t on the agenda of the two-day meeting.
Since a meeting two years ago in Moscow, the G-20 has frequently committed to refraining from targeting “exchange rates for competitive purposes.”
There will still be demands for laggards in the world economy to spur demand.
“Growth in the global economy remains uneven and the recovery is in progress, yet slow, especially in some advanced economies, notably the euro area and Japan,” the draft said.
For Lew, the U.S. Treasury Secretary, the “real challenge is getting other economies to get back in the growth pattern where they’re doing better,” he told CNBC.
To do so, officials will also say monetary policy needs to stay accommodative until the outlook improves and that when settings are changed they should be “carefully calibrated and clearly communicated to minimize negative spillovers,” the draft said.
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