Business Times - 13 Oct 2010
Currency wars: No armistice before Seoul G-20 summit
By LEON HADAR
AFTER global financial leaders failed to diffuse a potential currency war over the weekend, the US dollar continued falling against some major world currencies on Monday.
The decline in the US dollar reflected concerns over currency imbalances in the global economy, a problem that isn't expected to be resolved before the meeting of the world's 20 largest economies (G-20) in Seoul next month.
So, never mind the rhetoric coming out of Washington about the need for multilateral cooperation. There isn't a lot of optimism that the United States and China, the two major players whose policies are responsible for the global currency imbalances, will be able to reach an agreement that could set the stage for a consensus over global strategy to handle the issue before the upcoming G-20 meeting.
Such a strategy could take the form of the replay of the 1985 Plaza Accord that had brought about an orderly decline in the US dollar and avoided a potentially destabilising trade fight between the US and Japan.
But that successful agreement was the product of a very different global economic and diplomatic situation. It was when the US was regarded as the undisputed financial superpower and involved two trading partners - the US and Japan - that were also military allies.
In addition, the global financial system of the 1980s was confined to a smaller number of players (China was not part of it) and dominated by a tight group of large economies with common strategic interests, the G-7 club.
At present, there are fears among investors that the US and China, like governments around the world, will try to promote their own respective national economic interests instead of opting for a multilateral approach.
In that context, the US now seems to lack the power and the credibility to force some sort of an international consensus on the issue. The Obama administration, backed by Democratic and Republican lawmakers, has been insisting that the Chinese have been undervaluing the yuan against the US dollar in the way that provides Chinese exporters an unfair trade advantage and has been forcefully pushing Beijing to let the yuan appreciate.
The US House of Representatives has already adopted legislation that would give the administration more flexibility if it concludes that China is using its currency to support its exports. But it has some way to go before it becomes law.
Similar legislation needs to be passed in the Senate and then to be signed into law by President Barack Obama.
And on Friday, the US Treasury is scheduled to release its semi-annual report on whether China and other governments are manipulating their currencies.
The speculation is that in order to prevent aggravating the currency tensions with Beijing, the Obama administration will delay the release of the report until after the meeting in Seoul.
But with the American economic recovery slowing down and the rate of unemployment remaining high, and as Republicans and Democrats campaign in preparation for next month's midterm Congressional election, the administration and Congress may be forced to respond to the growing distress among voters by demonstrating that they are 'doing something' to punish China. Many voters think China as being responsible for America's manufacturing woes and thus for its job losses.
At the same time the Americans have been worried over China's accumulation of US dollar reserves, the Chinese are concerned that the US Federal Reserve's plan to engage in another round of quantitative easing is putting a downward pressure on the value of the US currency and could flood the financial markets with US dollars. That in turn could make it more difficult to sell US debt to foreign investors.
In any case, it is clear that US administration officials, led by Treasury Secretary Timothy Geithner, have not succeeded in their efforts during the annual meetings of the International Monetary Fund and the World Bank in Washington over the weekend to form an effective international coalition to press the Chinese to revise their exchange rate policy.
Indeed, China and other emerging economies such as Brazil seem to be intent on keeping their currency values low in order to help them sell their goods to the US at low prices.
The European Union members and Japan share US concerns over China's undervalued currency, but have not been inclined to embrace the more aggressive approach vis-Ã -vis China that the Americans are proposing.
That may leave the Obama administration with very few and costly choices, including the filing of a formal complaint before the World Trade Organization - a long process with uncertain outcomes - or to use US trade policy to retaliate unilaterally against China, which would turn the spectre of a trade war into a reality.
But the hope remains alive in Washington that a Sino-American deal could eventually be worked out before the summit in Seoul.
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