Tensions over global foreign exchange policies are running high as global finance ministers and central bank governors converge in Washington, just as the U.S. stages a renewed push to make emerging-market currencies appreciate in line with their soaring economic growth.
But not every finance official is on board with the U.S.-led view that state intervention in foreign-exchange markets is inherently bad.
One of the world's most respected economists challenged that view, casting doubt on the likelihood that a solution to a growing source of friction in the world economy can be solved easily.
Stanley Fischer, the American governor of the Bank of Israel and the former No. 2 at the International Monetary Fund, might have been expected to lend his weight to U.S. Treasury Secretary Timothy Geithner’s call to get emerging-market countries to allow their currencies to appreciate.
Instead, Mr. Fischer, who is also a former vice-chairman of U.S. banking giant Citigroup, expressed sympathy for the other side, saying the “massive” intervention going on in currency markets reflects governments and central banks doing what they feel is necessary to safeguard their economies.
“We don't have a good theory why countries shouldn't do this,” Mr. Fischer, who intervenes regularly to weaken Israel's currency, said Friday during a panel discussion at the Peterson Institute for International Economics.
Finance ministers and central bank governors are gathering in the U.S. capital for the annual meetings of the IMF and the World Bank. Tensions are high – so much so that some officials refused to discuss the subject of foreign exchange. Before beginning a speech on Thursday evening, French Finance Minister Christine Lagarde told her audience that she would not be discussing what her Brazilian counterpart last week called a “currency war.” Marco Buti, the head of economic affairs at the European Commission, also made a point of saying he would not discuss currencies when he took the podium at the Peterson Institute event.
Volatility in foreign-exchange markets is threatening economic stability and testing the Group of 20's commitment to co-ordinating economic policies so that measures aimed at domestic growth don't unduly harm other countries.
The U.S. dollar hit a 15-year low against the Japanese yen Friday, while falling for the fourth-straight week against the euro.
China spends an estimated average of $1-billion (U.S.) a day on U.S. treasuries and other assets to keep the yuan's value at a favourable rate relative to the U.S. dollar, yen and euro.
The reluctance to talk in public about currency policy reflects a worry that saying too much on the subject could inject even more volatility in foreign-exchange markets because traders are watching the IMF meetings closely for signals that policy makers might take co-ordinated action to adjust the value of major currencies.
Foreign-exchange rates are always ripe for conflict, even in good times. Tensions are more extreme now because the U.S., Japanese and European economies are so weak, creating an intense competition among exporters to make up for the absence of demand at home.
Japan last month sold yen to buy dollars to weaken its currency, the country's first intervention in six years. This week, the Bank of Japan reduced its already low benchmark interest rate to zero, matching the policy of the U.S. Federal Reserve. The Fed also is leaning toward creating hundreds of billions of dollars to buy Treasuries, the prospect of which is weighing on the dollar's value.
The European Central Bank left its benchmark rate unchanged this week, contributing to the euro's strength because of the gap in interest rates between Europe and the U.S. and Japan.
Nouriel Roubini, the New York University economist who correctly foresaw the financial crisis, predicted on Friday that the ECB would have to follow the lead of the Bank of Japan and the Fed or accept a euro that trades at $1.50 or $1.60 against the dollar.
“My guess is they will intervene,” said Prof. Roubini, adding that would only contribute to the volatility in foreign-exchange markets because China and other emerging markets would be forced to respond with yet more intervention of their own. “It's going to be a royal mess,” Prof. Roubini said.
Rather than debate the issue in public, officials took their dispute over currency policy behind closed doors. The subject was expected to dominate a dinner meeting of the Group of Seven countries Friday hosted by Finance Minister Jim Flaherty at the Canadian embassy. It was also a hot topic at a meeting of finance ministers from the Commonwealth.
“We're in the midst of these discussions now,” Mr. Flaherty said at a press conference after the Commonwealth meeting. “There is international will that we address this issue.”
