Currency exchange rates 'war' a concern ahead of IMF meeting
Currency exchange rates have taken center stage in financial markets, prompting investors to worry that nations will try devaluation as a way to bolster exports. The IMF's annual meeting is Friday in Washington.
European Central Bank President Jean Claude Trichet (l.) and Luxembourg Prime Minister Jean Claude Juncker listen to media questions at an EU Asia summit in Brussels on Tuesday,
Virginia Mayo/AP
The head of the European Central Bank (ECB) warned Thursday of the risk that "disorderly" shifts in exchange rates could harm a fragile global economy.
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The comment came as exchange rates have taken center stage in financial markets, with investors worried about the possibility of "currency wars," in which nations try devaluation as a way to bolster exports.
As ECB President Jean-Claude Trichet spoke, the euro touched an eight-month high of $1.40 per dollar.
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The issue will also be a major one as global finance officials meet at Friday's annual meeting of the International Monetary Fund (IMF) in Washington.
Several forces are roiling currency markets and sending up the price of gold – a hedge against currency volatility.
The US Federal Reserve appears ready to embark on a policy of "quantitative easing," an effort to inject money into the economy by purchasing bond assets. That could fan investor worries about inflation and push the US dollar down.
Also in the US, political pressure to confront China over its closely controlled exchange rate has been rising.
Some emerging economies and Asian nations, meanwhile, are struggling to prevent a rise in their currencies in exchange markets. From Japan and South Korea to Brazil, actions by central banks amplify the "currency war" threat.
The hope, as Mr. Trichet hinted, is that these problems can be resolved in an orderly way.
IMF chief Dominique Strauss-Kahn made a similar point Thursday. "I take very seriously the threat of a currency war, even a nascent one," he said in an interview published in Friday's edition of French newspaper Le Monde.
So far, some economists are skeptical that the threat will result in a 1930s-style crumbling of global commerce.
"It is all very unsettling," wrote economist Ed Yardeni in a report for investor clients last week. But "even during good times, there are protectionist flare-ups as domestic industries lobby their governments to protect them from unfair foreign competitors. I'm not convinced that we are seeing much more than is the norm."
