IMF Director General Dominique Strauss-Kahn urged governments in an interview published on Tuesday not to use their currency’s exchange rate as a weapon amid tough economic times.
“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Strauss-Kahn told the Financial Times.
“Translated into action, such an idea would represent a very serious risk to the global recovery ... Any such approach would have a negative and very damaging longer-run impact,” he said.
Following remarks by Brazilian Finance Minister Guido Mantega about the potential for a currency “war,” the IMF chief said: “We have seen reports that some emerging countries whose economies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side.”
“I don’t think that is a good solution,” he said.
Strauss-Kahn’s remarks came ahead of annual meetings of the IMF and World Bank in Washington this weekend.
Finance ministers and central bankers from the IMF’s 187 member states will gather from tomorrow amid mounting concern that the slow recovery is fueling increasingly protectionist policies.
US mumblings that Chinese exports unfairly benefit from an artificially weak yuan have escalated to a din that threatens to dominate the meeting as currency spats also proliferate elsewhere.
In recent weeks nearly a dozen governments from Colombia to Japan have admitted to buying up local currency in hopes of driving down its price to make exports cheaper.
A trio of top eurozone officials — Euro Group President Jean-Claude Juncker, European Central Bank President Jean-Claude Trichet and European Commissioner for Economic and Monetary Affairs Olli Rehn — on Tuesday urged Chinese Premier Wen Jiabao (溫家寶) to live up to a June vow to make the yuan more flexible, signaling Europe’s willingness to weigh in as the euro gains against other currencies.
In response, Wen urged the EU to treat the yuan exchange rate -issue objectively and fairly, the official Xinhua news agency reported.
Wen reaffirmed China would continue reforms to make the yuan more flexible.
US officials are adamant that the IMF meetings address the need for “market-oriented exchange rates” and the fund’s growing role in “rebalancing” the global economy.
“As America saves more those countries that were overly reliant on exports to the United States in the run-up to the crisis will need to change their policies,” a senior US official said on Tuesday.
“The IMF has a very important role to play, in this process of surveillance, insuring progress toward rebalancing strengthens,” the -official said.
The yuan has gained about 2 percent against the dollar since Beijing scrapped a 23-month-old peg to the greenback on June 19 and said it would let the currency resume its managed float.
“Addressing exchange rate issues should also be a key priority for multilateral negotiations among a core group of major economies,” said Charles Dallara, head of the Institute of International Finance, a group of the world’s largest banks.
In a letter to the IMF, Dallara called for a global accord and warned that resurgent protectionism could “sap the economic recovery and further undermine market confidence.”
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