Geithner Sees `Damaging Dynamic' in Currency Policies
Timothy Geithner, U.S. treasury secretary, waits to speak at the Brookings Institution in Washington, D.C. Photographer: Andrew Harrer/Bloomberg
Oct. 6 (Bloomberg) -- Constance Hunter, managing director and chief economist at Aladdin Capital Management LLP, talks about China's currency policy and the role of the World Trade Organization. Hunter speaks with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart."(Source: Bloomberg)
Treasury Secretary Timothy F. Geithner said a “damaging dynamic” of large economies keeping their currencies undervalued can cause inflation and asset bubbles, and he called on countries to coordinate 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” that is “much easier to solve if countries come together.”
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 that governments are engaging in a “currency war” as governments in Asia and Latin America sought to keep their currencies weak to spur exports.
The tensions are “at least a policing action” if not yet an outright currency war, said Edwin Truman, a former U.S. Treasury official who is a senior fellow at the Peterson Institute for International Economics, in an email today.
The dollar slumped to a 15-year low against the yen today, while the euro touched an eight-month high. The Dollar Index of six major currencies fell to levels last seen in January as the U.S. central bank is forecast to join the Bank of Japan in increasing purchases of government debt to spur growth.
‘Greatest Risk’
Geithner said the “greatest risk to the world economy today is that the largest economies underachieve on growth.” He also said the U.S. economy is “absolutely healing” and is seeing stability in house prices, even though the market remains “very weak.”
He kept up his calls for China to let the yuan rise against the dollar, saying the “main problem” is that a group of developing nations are not allowing their currencies to rise.
China is less likely to allow the yuan to climb if it is “not confident other countries will move with it,” Geithner said. The issue “is not something we’re going to solve in the next three months,” he said.
While Geithner said countries need to cooperate, he stopped short of endorsing an update of the Plaza Accord, the 1985 agreement among the world’s five major economies to weaken the dollar. He also said it’s important not to “focus too much” on currencies.
‘Significantly Undervalued’
“It is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange-rate systems,” Geithner said. “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.
“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.”
Every Tool
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.
“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.”
Japan Absolved
Geithner said Japan didn’t fuel international tensions when it intervened last month. When asked whether he thought Japan “set the fire” for the current market dynamic, Geithner responded, “I don’t, no.”
Japan intervened in the currency market for the first time since 2004 after the yen rose to a 15-year high against the dollar. Japan sold 2.12 trillion yen ($25 billion) from Aug. 28 through Sept. 28, according to the Ministry of Finance.
The yen has risen 12 percent against the dollar this year, the best performance among 16 major counterparts, on concern the U.S. recovery will slow and Europe’s sovereign-debt crisis will worsen.
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.”
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