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G20 says volatile currencies pose risk after dollar surges

Saturday, April 18, 2015 - 07:07
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Global finance chiefs identified volatile currencies as a threat to an improving world economy, signaling for the first time that they may be concerned by a surging US dollar.

[WASHINGTON] Global finance chiefs identified volatile currencies as a threat to an improving world economy, signaling for the first time that they may be concerned by a surging US dollar.

"There are important challenges including volatility in exchange rates," central bankers and finance ministers from the Group of 20 said in a statement after talks in Washington on Friday. Countries can use capital controls "as appropriate" to deal with large and volatile flows in cross-border funds, according to the statement.

The warning from the key economies comes after the dollar rose 17 per cent over the past year, according to the Bloomberg Dollar Spot Index. Behind the rise are investor bets that the Federal Reserve will soon raise its main interest rate for the first time since 2006 as the US economy outpaces foreign counterparts.

The worry is the more the dollar gains, the more markets will be unsettled after years of easy money. At particular risk are those emerging economies which tie their currencies to the greenback, produce commodities, boast large current-account deficits or have run up debts denominated in the dollar.

The reference to capital controls will probably "raise eyebrows," because of the conventional economic wisdom that countries should open up markets, said Torsten Slok, chief international economist at Deutsche Bank AG in New York.

"The traditional textbook will tell you that if you're an emerging market, a depreciation in your currency will be good for exports," he said in a phone interview. "This shows they recognize what a challenge it can be to manage your currency when things are moving this fast." As officials met, US stocks tumbled the most in three weeks amid a global selloff. The Bloomberg Dollar Spot Index, a gauge of the currency against 10 major counterparts, was little changed as it ended the week down 1.6 per cent. The yield on 10- year Treasuries dropped 3 basis points, or 0.03 percentage point, to 1.87 per cent, while oil slipped 0.9 per cent.

The G20 advised those at risk of capital flight to adopt policies that smooth flows of cash in and out of their countries. Brazil, Turkey, Russia, South Africa and Malaysia are among those investors view as vulnerable.

When threats arise from "large and volatile capital flows, the necessary macroeconomic adjustment could be supported by macro-prudential measures and, as appropriate, capital flow management measures," the G20 said.

As the Fed looks to raise interest rates, at least 30 other central banks have eased monetary policy this year, led by the European Central Bank's embrace of quantitative easing. That split is also aggravating shifts in financial markets as evidenced by declines in the yen and euro.

"In an environment of diverging monetary policy settings and rising financial market volatility, policy settings should be carefully calibrated and clearly communicated to minimise negative spillovers," the group of major advanced and developing economies said.

Its officials reaffirmed their "previous exchange rate commitments," referring to their pledge of the past two years not to weaken their currencies for competitive purposes.

Japanese Finance Minister Taro Aso told reporters the G-20 didn't criticize the weaker yen. French Finance Minister Michel Sapin said European policy makers are aiming for the euro to stabilize around its current levels.

"No one is seeking a new movement in the euro," Mr Sapin told reporters in Washington. "If we were to let it be understood that we wanted to go further in the decline in the value of the euro, then we'd enter into a dangerous area." Two years ago suggestions from Fed officials that they were poised to wind down their bond-buying programme upset markets in what became known as the "taper tantrum." The International Monetary Fund this week warned markets could be in for another bumpy ride if the Fed acts abruptly.

Still, officials from emerging markets said in Washington that the Fed may have learned its lesson as US policy makers flag plans to lift rates this year and pledge to then do so only gradually.

The Fed is "doing a much better job of communicating," Turkish Deputy Prime Minister Ali Babacan said on Friday. Reserve Bank of India Governor Raghuram Rajan said on Thursday that the likelihood of a Fed rate increase "has been a fairly well-advertised move" and that talk of a steady process "should calm people down."

The Fed still may not shift as soon as investors once anticipated with the climbing dollar and a string of weak economic data fanning speculation that Chair Janet Yellen and colleagues will now wait until September to tighten.

The G20 also said the global economy is in better shape since its officials met just two months ago, with the euro area and Japan showing signs of strengthening. It noted the possibility of prolonged low inflation, geopolitical tensions and the use of negative interest rates in some economies as other challenges.

The G20 meeting was eclipsed by continued concern that a cash crunch could force Greece out of the euro. UK Chancellor of the Exchequer George Osborne said the mood toward the Mediterranean nation was "noticeably more gloomy." "A misstep could easily return the world economy to the situation we were in three or four years ago," Mr Osborne said.

BLOOMBERG

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