Published February 16, 2013
MOSCOW – Financial leaders from the world's 20 biggest economies may have promised not to devalue their currencies to help exports, but the pledge will do little to keep exchange rates stable.
While G20 finance ministers and central bank governors can promise not to devalue their currencies directly, there can be no guarantees while central banks are pumping money into economies to make them grow again.
"We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes," the G20 financial leaders said in a closing statement after meeting in Moscow on Friday and Saturday.
But it is precisely the ultra-loose monetary policy of the U.S. Federal Reserve or Bank of Japan, aimed at helping their domestic economies to grow, that depressed the dollar and the yen and sparked the whole competitive devaluation debate.
That trend is unlikely to change, something China and other key emerging markets were quick to warn against in Moscow.
Fed chief Ben Bernanke said on Friday that "the United States was using domestic policy tools to advance domestic objectives".
Tokyo in turn insists that the Bank of Japan's pledge to start buying unlimited amounts government bonds is purely to help its shrinking economy get out of recession.
The G20 agreed there was nothing wrong with such policies.
But a devaluation of a currency, whether deliberate or just a side-effect of monetary policy, is still a devaluation. Calling it competitive or otherwise just labels the intent behind the move.
Canada's Finance Minister Jim Flaherty, asked after the G20 talks how to distinguish whether monetary policy was aimed at boosting the economy or specifically targeting the exchange rate said: "It's quite difficult to gauge that."
While Japan has insisted that neither this week's G7 or G20 currency statements required it to change policy tack in any way, anonymous briefing after the former said Tokyo was squarely being targeted.
Perhaps what riled the Group of Seven rich powers in particular is not Japan's policy slate, which could bolster world economic recovery, but statements by some Japanese officials targeting specific levels for the yen.
"The market will take the G20 statement as an approval for what it has been doing -- selling of the yen," said Neil Mellor, currency strategist at Bank of New York Mellon in London. "No censure of Japan means they will be off to the money printing presses."
G20 agreement that financial markets should set the exchange rate of a currency offers no relief to countries like Brazil whose relatively high interest rates attract capital from low interest-rate countries like the United States, putting upward pressure on its currency and making its exports more expensive.
European Central Bank Vice-President Vitor Constancio indicated the G20 pledge on avoiding competitive devaluations had more to do with the speed of exchange rate fluctuations.
"It all has to do with the avoidance of too abrupt movements in the exchange rate and keeping the exchange rate moving in just in one direction -- that would of course raise questions and would have to be discussed," Constancio told a news conference after the talks.
While G20 officials played down talk of "currency wars" -- a term coined by Brazil -- and International Monetary Fund head Christine Lagarde said they were more "currency worries", officials privately say they expect exchange rates to return to be on the agenda for many meetings to come.
"The G20 must consult permanently on what is happening in exchange rates, because it is a point of common interest. Any disorderly movements have to be discussed," Constancio said.
(Additional reporting by Randall Palmer and Ekaterina Golubkova and G20 team in Moscow. Editing by Mike Peacock)