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Currencies Back on Agenda as G-20 Monetary Policies Diverge

Saturday, 20 September 2014 10:18 AM

Currencies are back on the G-20 agenda as diverging monetary policies from the U.S. to Japan threaten to increase exchange-rate volatility.

Foreign-exchange “coordination” will be reflected in Sunday’s communique in Cairns, Australia, echoing a pledge by Group-of-20 economies in July 2013 in Moscow, South Korean Finance Minister Choi Kyung Hwan said in an interview.

The U.S. dollar has climbed as the Federal Reserve edges closer to its first interest-rate increase since 2006, while easing by the European Central Bank and the Bank of Japan are weighing on the yen and euro. In Cairns yesterday, U.S. Treasury Secretary Jacob J. Lew renewed a call for member nations to avoid currency intervention in a bid to gain a competitive edge.

Divergent monetary policies “have the risk of increasing uncertainties in global financial markets,” Choi said. Volatile foreign capital flows “could also have an impact on the foreign exchange rates.”

The dollar has climbed over the past three months against all 16 major peers tracked by Bloomberg, touching a six-year high versus the yen and a 14-month peak against the European currency.

‘Stable’ Moves

“It’s important for foreign-exchange rates to move in a stable manner by reflecting economic fundamentals,” Bank of Japan Governor Haruhiko Kuroda, who is also in Cairns, said. “It’s natural for it to move in accordance with changes in economic fundamentals.”

Kuroda said this month he would do what’s needed to achieve the BOJ’s inflation target as he continues unprecedented easing. The ECB has cut interest rates to record lows and committed to boost its balance sheet to the levels it had at the height of the sovereign debt crisis in 2012.

German Finance Minister Wolfgang Schaeuble told the G-20 meeting today that expansive fiscal and monetary policies could risk creating a bubble in equity and property markets, according to a German delegation official, who briefed reporters on condition of anonymity in line with policy.

ECB Governing Council member Jens Weidmann told Bloomberg News in Cairns that monetary policy should not be expansionary for longer than necessary to ensure price stability.

Fed policy makers, who met on Sept. 16-17, increased their median estimate for the federal funds rate to 1.375 percent at the end of next year, versus June’s forecast for 1.125 percent. The benchmark target rate has been in a range of zero to 0.25 percent since 2008 to support the economy.

More Volatility

The JPMorgan G7 Volatility Index rose as high as 8.08 this month, a level unseen since February. South Korea’s won is up 2.5 percent against the dollar in the past six months, the most among 11 Asian currencies tracked by Bloomberg.

After finance ministers and central bank chiefs met in Moscow in July 2013, they pledged: “We will refrain from competitive devaluation and will not target our exchange rates for competitive purposes.”

Lew revisited language from that communique. According to a statement from the U.S. Treasury Department, he told South Korea’s Choi that countries must meet “commitments to move toward market-determined exchange rates.”

Carlos Cozendey, secretary for international affairs at Brazil’s Finance Ministry, said ministers and central bankers didn’t really discuss foreign exchange intervention during the first day of G-20 meetings.

“We don’t really have any specific issues or problems on that right now,” he told reporters.

Italian Finance Minister Pier Carlo Padoan said in an interview that the discussion on currencies was limited.

‘Not at All’

In a statement in April this year in Washington, G-20 finance chiefs said they were committed to “exchange rate flexibility” among other steps to help meet their goal of boosting gross domestic product by an additional 2 percent over five years.

Choi said the South Korean government is “not at all” intervening in the foreign-exchange market to determine the won’s level. Lew’s comments were “reiterating the importance” of the issue, rather than singling out South Korea, Choi said.

While Choi said he lets the market determine the strength of the won, it’s different when moves are extreme.

“If there is a very sudden tilting toward one direction in a very short period of time in the foreign exchange market, then there would be some smoothing operations,” he said. “But that is something that is done not only in Korea but in all other countries.”

He described “smoothing” as the minimum level of effort made by the currency authority in times of such extreme fluctuations.

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Currencies are back on the G-20 agenda as diverging monetary policies from the U.S. to Japan threaten to increase exchange-rate volatility.
currencies, dollar, g20, economy
Saturday, 20 September 2014 10:18 AM
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