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IMF Meeting Stokes Fear of Currency War

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Fears of a global currency war have increased after the meeting of finance leaders at the International Monetary Fund in Washington last week. Talk of trade imbalances and uneven growth due to artificially low currencies has already sparked discussions about possible intervention.  Analysts say it's an issue that's not likely to go away anytime soon. 

As nations emerge from the global downturn, it's becoming clear that some countries are recovering faster than others.

In its most recent outlook, the International Monetary Fund says growth in developed countries will remain sluggish - even as emerging economies, especially those in Asia, are booming.

Last week, World Bank President Robert Zoellick warned that uneven growth is causing friction.

"We see this now in debates on currencies: developed countries are easing monetary policies; some developing countries are tightening in response to growth; some surplus countries are intervening to lower the value of their currencies to boost exports," he said. "And all this is causing international tensions."

The failure of finance ministers to come up with solutions last week in Washington has only deepened the divide. IMF managing director Dominique Strauss-Kahn.

"Many are talking about a currency war," he said. "Myself, I think I use this vocabulary which may be a bit too military. But it's true to say that many do consider their currency as a weapon and that's certainly not for the good of the global economy."

The US, for example, blames China's undervalued currency for contributing to the massive trade imbalance between the two.  

And countries such as Japan and Brazil have threatened to devalue their currencies to gain a competitive edge in exports.

Economist Toby Nandle says it's a big problem with no easy solutions.

"This is not a problem that can be delegated to an international organization such as the IMF," he said. "It's a problem that needs to be addressed by heads of state and by finance ministers because the resolution of said problem has profound affects on different economies."

Among them, China.  

Beijing has pledged greater flexibility in determining the value of the yuan. But Chinese premier Wen Jiabao says it will not happen overnight.

"Without this stability of the RMB exchange rate, there would be no stability for businesses, for employment, for our people, and also, if China has social and economic problems, it would be a disaster for the world," he said.

Experts say currency disputes have already jumped to the top of the queue as world leaders prepare for the G-20 summit in South Korea.  Barring a resolution, Nandle says the warning from Brazil could become reality.

"If there is no agreement by November 12th as to the global disconnect, I think that Guido Mantego [Brazil's Finance Minister] hit the nail on the head - we have a global currency war underway," he said.

Governments can devalue their currencies in different ways - from giving their central banks the ability to set margins on exchange rates to buying up foreign currencies to lower demand for their own.  

Economists say the resulting fluctuations would have serious implications for trade, causing nations to demand additional tariffs, and even blockades, against cheap imports.  

Such laws would hurt trade, further delaying a global recovery.

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EUR
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JPY
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GBP
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CAD
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INR
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