Euro trades at $1.4028 for first time since late January amid talk of ‘currency war’

Thursday, October 7, 2010

Currency war fears send dollar to 8-month euro low

PARIS — Fresh fears of a looming international currency war sent the dollar to an eight-month low against the euro Thursday as top world financial officials cautioned that competing devaluations of countries’ currencies could threaten the global economic recovery.

Warnings by International Monetary Fund chief Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet came as governments around the world are trying to gain trade advantage by keeping their currencies weak — what some consider a new wave of economic protectionism.

“I take very seriously the threat of a currency war, even a nascent one,” Strauss-Kahn said in an interview published in Friday’s edition of French newspaper Le Monde.

With the official aim of boosting growth, Japan and the U.S., among others, have implemented or are considering monetary stimulus that would lower market interest rates, thereby weakening the appeal of their currencies. Brazil has raised taxes on foreign acquisitions of its bonds to keep its currency down.

But the focus is largely on China, so far the most aggressive in keeping its national currency artificially weak. The U.S. and Europe complain this is costing them trade and jobs and have redoubled their efforts to push China to implement its months-old pledge to let the yuan appreciate.

The IMF chief said China’s currency was “at the root of tensions in the world economy that are becoming a threat,” and that China must speed up its currency appreciation “if we want to avoid creating the conditions for a new crisis.”

Also Thursday, the ECB’s head warned that excess volatility in exchange rates has “adverse implications” for economic stability.

Jean-Claude Trichet said he agrees with U.S. authorities when they say that “a strong dollar is in the interests of the United States.”

The euro broke briefly above $1.40 for the first time in eight months as he spoke — more than 20 cents above multiyear lows in June. It rose as high as $1.4028 before slipping back below $1.40.

Trichet said central bankers and officials will have an opportunity to discuss exchange rates during meetings in Washington, DC over the coming days.

Earlier, U.S. Treasury Secretary Timothy Geithner also stepped up pressure on Beijing to make more progress to let its currency fluctuate. In a speech at the Brookings Institution, Geithner said the United States would make currencies a major topic at international finance meetings this weekend in Washington.

Geithner said the IMF should play a bigger role in monitoring how countries manage their currencies.

“It is not good for the world, for the burden of solving this broader problem, the exchange rate problem, to rest on the shoulders of the United States,” he said.

In a report Wednesday, the IMF said that the global economy will require a balancing act: Countries with huge trade and budget deficits such as the United States will need to boost exports. And countries with big trade surpluses such as China must reduce their dependency on exports and boost domestic demand.

But the U.S. has argued that China has manipulated its currency to gain trade advantages and helped suppress U.S. exports. The undervalued Chinese currency has made Chinese goods cheaper for American consumers. It has also hurt U.S. companies by making their products costlier in China.

Chinese premier Wen Jiabao retorted that letting its currency rise would cost China export-based jobs and could lead to economic and social turmoil.

Speaking in Brussels, EU Commission spokesman Amadeu Altafaj said the EU is awaiting Chinese action on the yuan.

“We told Mr. Wen very frankly, very clearly without pressures, that we think China should implement their own commitment of the 19th of June” to give market forces more influence on its exchange rate, Altafaj said.

“It is fair to say that this announcement has not been followed up by concrete action, at least with respect to the euro exchange rate, and this is for us a crucial issue in times of fragile recovery surrounded by uncertainties,” Altafaj said. “There is a widespread consensus that China’s currency is still significantly undervalued.”

The dollar also fell to fresh lows against the Japanese currency, to 82.43 yen from 82.93 yen. The British pound rose slightly, to $1.5928 from the $1.5896.

Fed members have said they are willing to offer more relief for the struggling U.S. economy. Buying government debt from banks would lower interest rates in the economy, weakening the appeal of dollar assets.

Associated Press writers Raf Casert in Brussels and Geir Moulson in Berlin contributed to this report.

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