At IMF meeting, finance ministers may plot comprehensive currency market rig

Section:

Of course they'd never consider meddling in the gold market. Tokyo Rose himself says so.

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Dollar's Fall Roils World

As Global Leaders Meet, Strains Rise Among Nations Competing to Save Exports

By Tom Lauricella
The Wall Street Journal
Thursday, October 6, 2010

http://online.wsj.com/article/SB1000142405274870469630457553833402804142...

The dollar hit fresh lows against several currencies Thursday, raising pressure on global leaders to address worsening tensions among countries vying to keep their currencies weak and exports competitive.

The relentless rise of currencies from the Japanese yen to the Australian dollar is threatening to derail economic recoveries and global cooperation. In the six weeks since the Federal Reserve began discussing the prospect of further easing monetary policy, the dollar has fallen 7% against a basket of currencies.

Compounding matters are frustrations with the Chinese government's unwillingness to allow its currency, the yuan, to significantly appreciate.

... Dispatch continues below ...



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On Thursday in Washington, where finance ministers began gathering for the annual meeting of the International Monetary Fund, currency diplomacy was in the forefront for the first time in years. Ahead of the gathering, investors began speculating about the possibility of a global agreement designed to stabilize currency markets and manage an orderly decline of the dollar.

But officials played down the likelihood of any major coordinated steps to address key flash points, such as the dollar's decline and China's refusal to allow its yuan to rise as fast as other nations are demanding.

Investors who had been betting on the dollar switched their wagers in the past few weeks as they grew convinced the Fed will pump still more money into financial markets to bolster the struggling U.S. economy—essentially diluting the value of the dollar. Some of that money went into the euro, which has reached an eight-month high, and the rest found its way to currencies of commodity-focused or emerging-market nations.

A few months ago, the dollar was on the rise as investors focused on Europe's government-debt crisis. But the prospect of another round of "quantitative easing" by the Fed has turned the dollar into the weakest link among the major currencies.

The dollar fell to a fresh 15-year low against the yen of 82.40 and hit multi-year lows against a diverse group of other currencies, including those of South Africa, Israel and Switzerland. Australia, a commodity producer benefiting from strong demand from China, saw its currency rise to the highest level against the U.S. dollar since 1983.

Some of the dollar selling was tempered Thursday by traders thinking perhaps the dollar has fallen too far, too fast against the euro. The euro dropped 0.2% to $1.3912 after hitting a session high of 1.4028, up 17% from a low hit on June 7 of $1.1917.

"The U.S. dollar, the euro and the yen all have the same essential problems, but it's just that right now, it's the Fed that's likely to take this aggressive action... so the dollar fell in anticipation and may continue to fall," says John Burbank, chief investment officer at San Francisco-based hedge-fund manager Passport Capital.

While a weaker dollar may be good for U.S. exporters, it's been a headache for other countries, such as Japan. In early September, Tokyo's central bank fought back by selling some $20 billion worth of yen in the markets.

The strains have been widespread among emerging-market countries, which are indirectly feeling the effect of the dollar's decline through a loss of competitiveness against China, which essentially pegs its currency, the yuan, to the dollar. As a result of this link, when the currencies of countries such as South Korea rise against the dollar, they're also rising against the currency of China, their main competitor for exports.

The falling dollar complicates monetary policy for emerging economies. A good portion of the money heading to places like Brazil is from investors looking to earn higher bond yields than they can in the U.S., Europe and Japan, where interest rates are at rock bottom.

Meanwhile, many emerging markets are contending with incipient inflation. But raising rates to combat inflation would only attract more investors and magnify the currency issue.

The result has been heightened criticism of China, as well as efforts by central banks to fight the dollar's rise by intervening in the currency markets.

Now, amid chatter of "currency wars" among countries trying to keep their currencies weak, some investors are speculating it will take an agreement by governments around the world to manage the dollar's decline. That, they speculate, would happen in concert with a push for China to allow its currency to rise faster.

Some are harking back to the 1985 Plaza Accord among major industrialized nations, in which Japan agreed to allow its currency to appreciate. They see it as a possible framework for engineering an orderly decline in the dollar and avoiding potentially destabilizing trade fights.

"If you have a bunch of unilateral, uncoordinated actions, especially where they're operating directly in the foreign-exchange markets, they're likely to make a mess of things," says Edwin Truman, a former U.S. Treasury official and a senior fellow at the Peterson Institute for International Economics. "It's best to try and reach some broad understandings about where currencies should move."

For now, Mr. Truman says, the tensions don't quite rise to the level of a "currency war" as described by Brazil's Finance Minister Guido Mantega last week. "You might call it more of a police action. But it has the potential for getting completely out of control."

Officials played down the odds that IMF members will reach any overarching currency pact.

"I'm not sure the mood is to have a new Plaza or Louvre accord," the IMF's managing director, Dominique Strauss-Kahn, said at a press briefing, referring to the 1980s currency deals by the U.S., Japan and Europe. "We are in a different time today."

Yi Gang, deputy governor of China's central bank, called an Asian accord to boost the value of Asian currencies in tandem "very unlikely."

Instead, IMF members are sure to discuss currency issues in the context of the Group of 20 industrialized nations' effort to "rebalance" global growth.

In that initiative, countries with trade surpluses—especially China—would agree to shift from export-led growth to domestic consumption. Trade-deficit countries—especially the U.S.—would agree to do the opposite.

China would need to boost the value of the yuan, though Mr. Yi said it will proceed at a "gradual and stable approach." He called that "good for China and good for the rest of the world."

European Central Bank President Jean-Claude Trichet said Thursday that currency levels should reflect economic fundamentals.

"Excess volatility...[has] adverse implications for economic and financial stability," he said at a news conference, after the central bank for the 16-nation euro zone announced it would keep its benchmark interest rates unchanged.

Douglas Borthwick, a managing director at Faros Trading LLC in Stamford, Conn., says the odds of a new Plaza-style accord are rising nonetheless.

"Finance ministers all understand that the dollar's going to be weakening," he says, and the best way to handle that is through a coordinated effort.

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