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Currency war continues…

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Currency tensions persist as markets await Fed

(Reuters) – Recriminations over currencies reverberated worldwide on Friday ahead of a speech by Federal Reserve chief Ben Bernanke, whose loose policies are blamed by China and others for destabilizing capital flows.

Beijing kept up the heat on the United States, saying Washington should not make China a scapegoat for its own problems by constantly pressing for a swifter rise in the yuan.

Speaking hours before the U.S. Treasury Department is due to deliver its semi-annual assessment of whether China manipulates its currency, Commerce Ministry spokesman Yao Jian said it was not fair to criticize Beijing’s exchange rate policy simply by pointing to China’s trade surplus.

“Other countries have no right to comment on what is a reasonable level for a country’s trade surplus,” Yao told a monthly news conference.

Sniping over what exchange rates are appropriate to put the world economy back on course is intensifying ahead of a pair meetings of the Group of 20 leading economies in South Korea.

European Central Bank policymaker Juergen Stark was reported as saying countries must avoid a ‘fatal’ race to devalue and instead coordinate better to smooth out currency swings.

Both he and his colleague, Jose Manuel Gonzalez-Paramo, said China, which is resisting pressure from the United States and other developed nations to allow its yuan to revalue faster, needed to be more flexible.

G20 Finance ministers meet next week in Gyeongju to prepare for a summit of their leaders in Seoul on November 11-12.

U.S. data on Thursday showed America’s trade deficit with China swelled to a record high of $28 billion in August — grist to the mill of U.S. politicians who say that China keeps the yuan artificially cheap to help its exporters.

Spot yuan ended at its highest closing level against the dollar since its landmark revaluation in July 2005 but U.S. critics say it is still 20 percent or more undervalued.

LOGGERHEADS

Japanese Finance Minister Yoshihiko Noda stressed that countries must work together to strengthen the global currency order. Governments would find it tough to cope with the current environment on their own, he told reporters.

Noda struck a more conciliatory tone than on Wednesday, when he criticized South Korea for intervening repeatedly to curb the won, and China, for dragging its heels in letting the yuan rise.

“Before saying this or that about other countries’ currency policies, we must do what we should do,” Noda said.

Yao, the Chinese Commerce Ministry spokesman, was in no mood to forgive or forget. Japan has “no reason, no grounds and is not qualified” to criticize China’s currency policy, he said.

Some South Korean newspapers weighed in too, saying Japan risked sacrificing friendly diplomatic relations with its neighbors to placate its export companies, which are suffering due to the yen’s rise to a 15-year high against the dollar.

The dollar hovered near a 10-month low versus a currency basket as the conviction hardened that the Fed will further ease monetary policy next month to try to kick-start the lethargic U.S. economy.

WAITING FOR BERNANKE

Financial markets, which expect the U.S. central bank to begin soon a second round of buying of U.S. Treasury bonds with new money — to the tune of $500 billion or more — will hang on Bernanke’s words for clues about the likely scope.

The Fed’s policy remit is domestic, but the side-effects of minting new dollars to pay for the asset purchases are a weaker dollar and investors’ rush into emerging markets, where growth prospects are brighter and yields are higher.

In response, several governments have stepped into forex markets or tried to curb capital inflows, raising fears of a currency “race to the bottom” that may trigger protectionism and hit global growth.

“With the recovery slow in the advanced countries, each country relies more on exports for growth and tension surrounding foreign exchange rates is intensifying,” South Korean Finance Minister Yoon Jeung-hyun said. “There are signs that this could develop into trade protectionism.”

Lawrence Summers, a top economic adviser to U.S. President Barack Obama, also flagged protectionism as a rising threat to the global economy that destroys value.

Singapore decided on Thursday not stand in the way of market forces and said it would let its dollar rise more quickly.

But India intervened to temper a rising rupee, while South Korea tried to deter unwanted inflows by keeping interest rates steady even at the risk of allowing inflation to build.

Thailand this week imposed a withholding tax on foreign purchases of government bonds. But the new chief of the central bank said Bangkok would be wary about further steps.

“Stringent measures will have side effects, so what to use and when, we have to look at the real situation,” Bank of Thailand Governor Prasarn Trairatvorakul said.

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