IMF Chief Warns on Exchange Rate Wars

Governments are risking a currency war if they try to use exchange rates to solve domestic problems, the head of the International Monetary Fund has warned.

IMF Managing Director Dominique Strauss-Kahn
Mandel Ngan | AFP | Getty Images
IMF Managing Director Dominique Strauss-Kahn

The comments by Dominique Strauss-Kahn came before the yen fell as a result of the Bank of Japan shifting towards quantitative monetary easing, cutting its key interest rate and proposing a new fund to buy government bonds and other assets.

“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Mr Strauss-Kahn told the Financial Times on Monday.

“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.”

The yen dropped against the dollar on Tuesday after the BoJ announced its decision.

Government bonds, stocks and gold prices all rose on the expectation that central banks of the world’s biggest economies would embark on a round of quantitative easing.

In recent weeks several major economies have taken measures to relieve upward pressure on their currencies. Japan intervened in the currency markets to sell yen for the first time in six years.

Brazil has threatened intervention to hold down the real, and on Monday doubled a tax on foreign purchases of bonds in an attempt to reduce inflows. Last week Guido Mantega, Brazil’s finance minister, warned of a currency war.

“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,” Mr Strauss-Kahn said. “I don’t think that is a good solution.”

Mr Strauss-Kahn was speaking ahead of the annual meetings of the IMF and World Bank in Washington this weekend, at which the troubled global economy and the imbalances in current account deficits are likely to feature prominently.

European policymakers said they had disagreed with Wen Jiabao, the Chinese premier, after meetings in Brussels.

Jean-Claude Juncker, chairman of the group of eurozone finance ministers, said there was a “divergence of analysis” between the Chinese and the European authorities.

“We think the Chinese currency is broadly undervalued,” he said.

This week Mr Wen said China would buy Greek government bonds as a sign of confidence in the country’s ability to escape default. But economists said Chinese purchases of bonds would also push up the euro against the renminbi.