The world’s biggest bank lobby is calling on the Group of 20 nations to set out a coherent position on currencies, warning that failure to do so risks exacerbating the already extreme volatility in foreign exchange markets.
Timothy Adams, managing director of the Institute of International Finance, which represents more than 470 financial institutions, sought to defuse talk of a “currency war” Monday, telling reporters in Washington that he doubts governments in Japan, the United States and elsewhere are actively seeking to weaken foreign exchange rates at the expense of their trading partners.
Still, Mr. Adams, a former senior Treasury official in the administration of George W. Bush, said international investors have every reason to be skeptical about his assurance.
Officials from the world’s major economies have done little to show they are talking to each other, even as they implement domestic stimulus policies that affect the way traders price the currency market. Instead, the narrative explaining the forces driving foreign exchange prices is being formed by sporadic comments by G20 officials. Japan’s new efforts to stoke its chronically deflationary economy have had the spillover effect of weakening the yen, yet the country’s international partners have failed to make clear that they accept that the yen isn’t the focus of Japan’s policies.
“There is a message void, and that message void is filled by whoever has the microphone in a given week,” Mr. Adams said at a press briefing. “Markets are looking for something to help them understand what is going on.”
G20 finance ministers and central bank governors are set to gather for the first time this year at the end of the week in Moscow, and reports suggest currencies will be at the top of the agenda.
The smaller Group of Seven big developed economies is considering issuing a statement that repeats its support of flexible currencies, while adding a disavowal of using fiscal and monetary policy to drive foreign exchange rates, Bloomberg News reported , citing two unnamed G7 officials. The G7 includes the U.S., Japan, Germany, Britain, France, Italy and Canada. Those countries, along with major emerging markets such as China and Brazil, form the core of the G20, which emerged as the main body for organizing international economic policy during the financial crisis.
Japan’s new Prime Minister, Shinzo Abe, has pushed for aggressive monetary policy to break a deflationary cycle that has lasted two decades. The shift has resulted in a sharp drop in the value of the yen, as traders flee Japan in search of higher interest rates. Many of them have chosen Europe, causing a surge in the euro that some of the continent’s policy makers say risks extending the region’s recession.
“Exchange rates can’t be subject to moods or speculation,” French Finance Minister Pierre Moscovici said Monday in Brussels, according to Bloomberg. “I’m pleading for a co-ordinated approach at the international level which enables exchange rate stability, and also that these exchange rates reflect the fundamentals of our economies.”
Other European countries dispute the need to actively control the value of the euro, and Jen Weidmann, the head of the German central bank, said Monday that the euro isn’t overvalued. Japanese officials deny they are targeting the yen, yet German Chancellor Angela Merkel and Canadian Finance Minister Jim Flaherty both have expressed concern about Japan’s actions in recent weeks.
Back in Washington, Mr. Adams, who will be travelling to Moscow for the G20 meeting, said he was heartened by the reports that the G7 was considering a statement on currencies and urged officials to go through with it. A common refrain at the various press conferences that will be held in Moscow would go a long way to calming volatility in foreign exchange markets, said Mr. Adams, who used to negotiate G7 and G20 statements when he served at the Treasury Department.
“Without some articulation of a common view, I have no reason to think there will be any change,” he said.