Currency Wars

From Bloomberg:

Treasury Secretary Timothy F. Geithner said a “damaging dynamic” of large economies keeping their currencies undervalued can cause inflation and asset bubbles, and called on countries to coordinate their policies.

“More and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies,” Geithner said in a speech today at the Brookings Institution in Washington. He said currencies are “inherently a multilateral issue. It’s much easier to solve if countries come together and do things to complement each other.”

Global exchange-rate policies are a source of contention ahead of this week’s meeting in Washington of the International Monetary Fund, World Bank and Group of 20 officials. Brazil’s Finance Minister Guido Mantega last week warned of a “currency war.”

“It is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange-rate systems,” Geithner said, without mentioning any specific country. “This is particularly important for those countries whose currencies are significantly undervalued.”

Geithner’s comments echoed calls by the IMF for greater currency flexibility as part of an effort to encourage more balanced global growth, with emerging nations relying less on exports and developed countries curbing their appetite for imported goods.

Blanchard Comments

“Many emerging-market economies continue to run large current-account surpluses and to respond to capital inflows primarily through reserve accumulation rather than exchange-rate appreciation,” the IMF’s chief economist, Olivier Blanchard, wrote in a report released today. “International reserves are higher than they have ever been and continue to increase.”

Geithner said last month the Obama administration will use every available tool to urge China to let its currency rise more quickly. China has capped the yuan’s gain at 2 percent since relaxing a dollar peg in June, leading to criticism that it is stunting the recovery in the industrial world by shielding its market from U.S. and European imports.

Chinese Premier Wen Jiabao said today a rapid increase of the yuan would hobble China’s economy, dealing a fresh rebuke to U.S. and European calls for a higher exchange rate.

Wen’s Warning

“If the yuan isn’t stable, it will bring disaster to China and the world,” Wen told a business conference before a Europe- China summit in Brussels. “If we increase the yuan by 20 percent-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil. If China’s economy goes down, it’s not good for the world economy.”

On Europe, Geithner said not all the continent’s nations face the same obstacles.

“I think you have to distinguish the challenges faced by Greece, by Spain, Portugal, Ireland,” Geithner said in response to questions. Those countries need “to move very, very aggressively to bring their commitments more in line with their resources. That is the essential path for policy in those countries.”

Geithner also said the “greatest risk to the world economy today is that the largest economies underachieve on growth.”