Currency war warning

The head of the International
Monetary Fund has waded into the growing international row over exchange rates,
warning against governments using exchange rates as a weapon.

Dominique Strauss-Kahn said
governments are risking a currency war if they use exchange rates to solve
their own problems.

 “Translated into action, such an idea
would represent a very serious risk to the global recovery … Any such approach
would have a negative and very damaging longer-run impact”, he said.

Finance ministers from the G7 are
set to discuss growing concerns over currency wars on the sidelines of the
annual IMF gathering in Washington on Friday, as some governments manipulate
their currencies to bolster exports.

The Bank of Japan reinstated its
zero interest rate policy and pledged to buy $58 billion of assets, leading to
a drop in the yen. In recent weeks it also intervened in the currency markets
to weaken the yen for the first time in six years, although the impact was
short-lived. Brazil has threatened intervention to weaken the real, and doubled
a tax on foreign investors buying local bonds to put a lid on a recent rally in
its currency.

Brazil’s finance minister, Guido
Mantega, coined the “international currency war” phrase following a
series of interventions by central banks in Japan, South Korea, Switzerland and
Taiwan to make their currencies cheaper.

Strauss-Kahn appeared to refer to
Mantega’s comments when he said: “We have seen reports that some emerging
countries whose economies face big capital inflows are saying that maybe it is
time to use their currencies to try to gain an advantage, particularly on the
trade side. I don’t think that is a good solution.”

Many countries, including the UK,
see exports as an important part of any economic recovery. A weaker currency
makes it easier for a country’s manufacturers to sell their goods abroad.

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