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G20: Currency Policy Top Issue

The G20 summit gets underway late next week in Seoul. The theme of the meeting is “Shared Growth Beyond Crisis.”

The G20 Research Group, based in Toronto, has been following developments and issues relating to the summit. Co-director Alan Alexandroff says currency policy is high on the agenda.

“I think the big issue again and continuing is the question of whether or not to kind of imbed the issue of currency and currency regimes within the broader framework of global imbalances,” he says.

Alexandroff says this was a “key discussion” at the foreign ministers’ and central bankers’ meeting two weeks ago. It’s expected to resurface when foreign ministers and bankers meet just before the G20 summit.

Why it’s a big deal

If the G20 does not produce a broad, multi-lateral agreement on currency policy, then the United States and China could square off over the issue.

“What we were facing previously, and may still face, is a kind of knockdown, drag ‘em out fight between the United States and China on the question of currency and the exchange rate between the U.S. dollar and the Chinese renminbi,” he says.

He says the United States has long argued than the “unwillingness to move to a market approach currency is manipulating and undervaluing the Chinese currency. And ultimately, from an American perspective, they believe that can be an issue of jobs in the United States.”

Critical of the Fed

The U.S. Federal Reserve Bank plans to pump $600 billion into the economy to try to jump start it. That’s upsetting some other G20 countries.

“Yes, absolutely, it is,” he says. “It’s upsetting particularly to the larger emerging market countries, which are growing relatively rapidly as compared to the United States and other, European, countries. And it’s upsetting them because the concern, from their perspective, is that this is going to push funds out into the system.”

It could mean investment dollars flowing from the U.S. to the emerging market countries, where investors could see a better rate of return.

“This will potentially boost inflation in those economies,” he says, “I think most of these countries believe that the U.S. effort should be in the direction of a second fiscal stimulus in order to boost investment and create more jobs in the United States. But realistically, in the politics of Washington, that’s not going to happen.”

That’s where the Fed comes in. “It would appear that this monetary strategy (pumping money into the economy) is what the United States is going to follow…and there is concern in the large emerging market countries and in the developing countries that this is going to hurt them,” Alexandroff says.

The G20 leaders meet November 11th and 12th.