G7 safeguards exchange rates to avoid currency war

 

The G7 nations’ finance chiefs and central bankers today pledged not to trigger a damaging currency war with deliberate actions to drive exchange rates down.

The rare public statement comes amid growing concerns over the efforts of Japan’s new prime minister Shinzo Abe to get the world’s third-biggest economy moving with aggressive monetary stimulus — forcing down the value of the yen for the export-dependent nation.

The G7 in May will be co-chaired by Bank of England Governor Sir Mervyn King. The UK said the seven countries reaffirmed “our long-standing commitment to market-determined exchange rates”.

Crucially it added that “our fiscal and monetary policies have been and will remain oriented to meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates”.

It said: “We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability”.

But analysts said the statement gave Japan approval to continue with its efforts to boost growth after earlier speculation that the nation would face a public censure at this weekend’s G20 meeting. CMC Markets analyst Michael Hewson said: “This statement is basically a green light for everybody to do what they want.”

The US Federal Reserve is pumping $85 billion (£54.5 billion) a month into the economy to bring down the unemployment rate.

ING’s head of currencies Chris Turner said: “With Washington having set the bar low for massive monetary expansion and currency weakness, clearly it is difficult for it to preach to Tokyo. And we very much doubt this G7 agreement has any bearing on Tokyo’s domestic policy of aggressive BoJ balance sheet growth and inflation targeting. In effect, the message of this brief statement is that ‘it’s fine to devalue, but just don’t talk about it’.”

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