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October 10, 2010    

IMF gathering fails to tackle threat of currency war

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by Kay Murchie

Last week, the International Monetary Fund (IMF) expressed its concern for a currency war.

The Fund said if Governments across the world use exchange rates as a policy weapon, there could be a serious risk to global economic recovery.

However, this weekend’s IMF and World Bank annual meeting in Washington saw the currency issue unresolved.

Some Governments have been accused of manipulating their currencies in order to boost exports.

China, in particular, has been under pressure to revalue its currency, the yuan. The US continues to express dissatisfaction that China is keeping the value of the yuan low to help its exporters at the expense of overseas competitors.

This weekend, officials from the IMF have said that if China let its currency appreciate, Chinese imports would become more expensive, therefore triggering demand for US goods.

Currently, the US is faced with rising unemployment despite strong economic growth. This has sparked fears of a “jobless recovery” which could result in political and social unrest, the IMF said.

In the meantime, the Bank of Japan last week adopted an unexpected move and cut interest rates to almost zero.

This led to a fall in the value of the yen against the US dollar. Japan has been concerned that a strong yen is damaging for its economy.

A stronger yen has meant demand for exports has weakened. The Bank recently took action to weaken the currency – it was the first time in six years that such action had been taken.

Meanwhile, Brazil has threatened intervention to weaken its currency – the real, while there have been a series of interventions by central banks in South Korea, Switzerland and Taiwan to make their currencies cheaper.

Speaking of the currency “frictions”, the IMF Committee’s chairman, Youssef Boutros-Ghali, said the IMF should play a major part in addressing currency issues.

G20 finance ministers and central bank governors are scheduled to meet in South Korea later this month, before a leaders summit in Seoul on November 11th and 12th.

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