G-20 Nations Wrangle Over Strengthening Vow on Currencies

Nov. 11 (Bloomberg) — Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole CIB in Hong Kong, talks about the outlook for Group of 20 discussions on global currencies. Speaking with Maryam Nemazee on Bloomberg Television’s “Countdown,” he also discusses the outlook for the euro. (Source: Bloomberg)

The Group of 20 is struggling to build on a commitment last month to address currency and trade imbalances blamed for fueling asset bubbles and stoking protectionism.

Canadian Prime Minister Stephen Harper said he’s “not so sure” an agreement will be reached by the end of the group’s summit in Seoul tomorrow. Negotiators have yet to bridge disagreements on either exchange-rate policy or appropriate imbalances in trade and capital flows, G-20 committee spokesman Kim Yoon Kyung told reporters today.

The arguments center on which of the world’s two biggest economies, the U.S. and China, are to blame for distorting trade and investment flows. Failure to narrow those differences risks fueling further capital controls and hobbling the global economic recovery.

“They have to deal with the underlying causes for this instability, which are these imbalances,” said Josef Ackermann, chairman of the management board of Frankfurt-based Deutsche Bank AG. “It’s not about assigning blame to who is in deficit and who is in surplus — the markets will decide who is in surplus and who in deficit — but to create a framework to find the right balance.”

A meeting of finance ministers and central bankers last month agreed to move toward “more market-determined exchange rate systems” and “reducing excessive imbalances.”

The U.S. Federal Reserve a week later said it would pump $600 billion into the economy to boost growth. Brazil, Germany and China said move would drive down the dollar and fuel speculative flows of capital that risk asset bubbles.

‘Huge Engine’

“The most important thing the United States can do for the world economy is to grow because we continue to be the world’s largest market and a huge engine for all other countries to grow,” President Barack Obama said at a Seoul press conference today with South Korean President Lee Myung Bak.

Obama later sat down with Hu Jintao, president of China, a country whose record $28 billion trade surplus with the U.S. in August — announced on the eve of the summit — heightened complaints it keeps its currency undervalued.

The U.S. is pushing China to let the yuan appreciate faster to curb the trade surplus.

China, along with Germany, opposed a suggestion last month by U.S. Treasury Secretary Timothy F. Geithner that the G-20 consider targets for reining in excessive current-account imbalances. To meet the targets, countries like China would likely have to let the value of their currency rise, making their exports more expensive.

Both to Blame

Former Federal Reserve Chairman Alan Greenspan, writing in an opinion piece in the Financial Times today, said that both the U.S. and China are depressing their currencies.

“We will never seek to weaken our currency as a tool to gain competitive advantage,” Geithner said in a transcript of an interview with CNBC television distributed by e-mail today.

China’s yuan, which Treasury Secretary Timothy F. Geithner said Nov. 8 should further appreciate, rose to a 17-year high against the dollar today and has climbed 3 percent since June. China allowed a faster pace of gains this week, a strengthening of 0.7 percent since Nov. 8, the yuan’s biggest three-day advance since a currency peg ended in July 2005.

Superior Products

German Chancellor Angela Merkel dismissed the idea of setting limits on trade gaps. Differences in competitiveness between countries can’t be leveled by “politically imposed limits,” she told a meeting of global business leaders in Seoul.

Germany’s surplus is a product of market forces and evidence of superior products, Merkel said in an interview with Die Welt newspaper published yesterday.

Germany’s current-account surplus as a percentage of gross domestic product for 2010 is set to be 6.1 percent, the second highest in the G-20, after Saudi Arabia, according to International Monetary Fund projections. The U.S. is likely to see a deficit equivalent to 3.2 percent of GDP, the third deepest, it said.

Setting limits on trade gaps “is an idea that should be discussed,” French Finance Minister Christine Lagarde said.

France takes over the presidency of the Group of 20 tomorrow after the summit chaired by South Korea’s Lee.

“Geithner’s idea is one of many that should be discussed,” she said at a press conference in Seoul. “There will be other ideas, and they all need to be considered to create a system that brings greater stability.”

The French government has said it will begin its G-20 presidency by holding seminars to discuss reforming the international monetary system. France has blamed the dollar’s role as the sole reserve currency for creating massive liquidity flows that led to the financial crisis.

“You have on the one hand a country in deficit with a reserve currency that’s freely floating, and on the other an administered money that’s based on amassing large reserves,” Lagarde said, referring to the U.S. and China. “We need a forum where they can discuss and define mechanisms of stability.”


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