ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Conflict over Exchange Rates

The conflict between the US and China over the renminbi-dollar exchange rate is set to deepen.

The grim portraits of the world economy, and especially those of the United States (US), the euro-zone countries and Japan, sketched by the International Monetary Fund’s (IMF) October 2010 World Economic Outlook and Global Financial Stability Report set the tone for last weekend’s semi-annual meeting of the Bretton Woods twins. Brazil’s finance minister, Guido Mantega’s public assertion in Sao Paulo towards the end of last month of the existence of a “currency war” had already disturbed the mood. But, as expected, the final communiqué only produced a set of platitudes, nothing more.

Rhetoric though was much on display. On the eve of the meeting, the IMF’s managing director, Dominique Strauss-Kahn, warned that the historical record proved that use of currencies as a competitive weapon could lead to a “catastrophe”. US Treasury Secretary Timothy Geithner found fault with China’s “significantly undervalued” currency, without, of course, naming the dragon country, and went on to ask the IMF to strengthen its “surveillance of exchange-rate policies and reserve accumulation practices”. The governor of China’s central bank, Zhou Xiachuan, in turn, blamed the unconventional monetary policies of the “major reserve currency issuers” (read mainly the US Federal Reserve) and the failure of the developed countries to repair and reform their financial systems. He even talked about the possible deterioration of sovereign risks leading to global financial instability (Was he implying that a sovereign debt crisis might unfold in the US?)! The spokesperson of the euro-zone finance ministers, Jean-Claude Juncker of Luxembourg, felt that the G-20 was not capable of finding a solution to the currency conundrum and that the G-7 plus China was the ideal forum for a resolution. That puts a question mark on whether the 11-12 November G-20 meeting in Seoul would produce anything other than pious banalities. The floor was left to the candid Guido Mantega to suggest a practical solution – he came up with the idea of the G-20 working out “something like a Plaza Accord”.

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