Despite securing an agreement from Group of 20 (G-20) officials to avoid weakening their currencies any further, the Obama administration failed to convince member countries to implement specific guidelines to measure compliance and monitor trade imbalances.
At a meeting last weekend in Gyeongju, South Korea, finance ministers from both developed and emerging economies agreed to try to maintain trade balances at "sustainable levels," which they left to be negotiated at a future date. They were unable to reach consensus on precise targets, as the United States proposed. G-20 members will meet again in Seoul on Nov. 11 and 12.
The G-20 was able to hammer out a deal to get China and the United States - as well as the other G-20 nations - to agree to "refrain from competitive devaluation of currencies," and to let markets set foreign-exchange values. China is widely seen as keeping its currency undervalued to boost its exports, while the United States has been accused of pursuing a weak dollar policy, also to increase its overseas shipments.
"The foreign-exchange war is not over," Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan, wrote in a note to investors, Bloomberg News reported yesterday (Monday). "Prospects of an ultra-loose monetary policy in the U.S. do not bode well for the greenback."
The dollar has slumped more than 2.5% against all 16 major counterparts since the end of August amid speculation that the Fed will pump more cash into the economy to safeguard the recovery.
The G-20 communiqué called on the world's major economies to cooperate on monetary and trade policies.
Policymakers agreed to "be vigilant against excess volatility and disorderly movement in exchange rates" and China agreed to "move towards more market-determined exchange-rate systems that reflect underlying fundamentals."
The G-20 session "was a way to get the Chinese and the U.S. on the same page," Hyun-Song Shin, a Princeton University economist who advises G-20 host South Korea told The Wall Street Journal.
But since the G-20 currently lacks any enforcement mechanism, U.S. Treasury Secretary Timothy Geithner pushed to make a deal as specific as possible, pressing other countries to hold current-account imbalances "below a specified share of gross domestic product (GDP) over the next few years."
Geithner proposed a 4% limit on trade surpluses, in an effort to get China to agree to a target that the U.S. believes can be met only if Beijing allows the yuan to rise, The Journal reported.
China's current-account surplus is at 4.7%, according to the International Monetary Fund (IMF). Meanwhile, the United States is running a trade deficit of 3.2%. The IMF estimates China's current-account surplus will rise to around 8% in 2015.
Germany and China were the primary objectors against U.S. efforts to get specific targets written into the agreement. Germany, which is running an account surplus near 6%, is concerned about being lumped in with China, even though the euro floats freely while the yuan doesn't.
Instead, the G-20 said it would adopt "indicative guidelines," a phrase that is yet to be defined.
Geithner kept up the pressure by flying to the Chinese coastal city of Qingdao for an unexpected meeting with China's top finance official, Wang Qishan, vice premier in charge of economic affairs.
Chinese officials still have a "ways to go" on loosening the yuan's ties to the dollar, the Treasury chief said.
"But I think they're committed to do that, because they recognize it's in their interest," he told Bloomberg.
The ministers also agreed to give emerging market countries, notably China and India, far more influence over the IMF.
The IMF in the last two years has vastly increased its power to assist countries on the brink of financial disaster but has been widely criticized for representing the views basically of established economies.
News & Related Story Links:
- Bloomberg:
Dollar Weakens on G-20 Vow, Fed; Stocks, Commodities Advance - Wall Street Journal:
G-20 Presses On With Plan to Cool Currency Battles - Money Morning:
Money Morning Mailbag: China Needs to Boost Domestic Demand to Continue Economic Recovery - Money Morning Archives:
Currency War