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Weak economy sparks 'currency war'

Fears of a full-blown currency war have flared as the dollar fell to an eight-month low against the euro and the US stepped up pressure on China to let its currency rise.

The escalating tension threatened to dominate a three-day conference of the International Monetary Fund and the World Bank in Washington, with leaders from both groups warning that a currency war could destabilise global financial markets at a fragile moment.

The flare-up comes as investors are anticipating the US Federal Reserve will pump billions more dollars into the American economy, a move which is weakening the value of the dollar against the resurgent euro.

A falling dollar can affect US consumers, investors and businesses in various ways - travel to Europe becomes more expensive for Americans, exports from US businesses become more affordable for European buyers and US Treasurys become less attractive to investors.

A different scenario has been playing out with China, where an undervalued Chinese yuan has weakened US exports while making Chinese goods attractive to US consumers.

The imbalance has weakened US economic growth, and it threatens US manufacturing jobs at a time when the American economy is struggling with 9.6% unemployment.

World Bank President Robert Zoellick said that the tensions over currencies could undermine investor confidence at a time when the world needs the private sector to bolster growth.

"If ever there were a time that we should not turn our backs on international cooperation, it is now," Zoellick said at a news conference ahead of three days of high-level talks on global finance in Washington.

Economists said they don't expect major breakthroughs coming out of the weekend meetings, although countries are feeling so much pressure to produce jobs by boosting exports and one way to do that is by lowering the value of the country's currency.

China is hardly alone in trying to gain a competitive advantage, with the United States contributing to a weaker dollar by pressuring Beijing and by the Fed flooding the markets with US dollars. The Japanese government intervened in currency markets for the first time in years in September, while Brazil and South Korea have also taken recent actions to weaken their currencies as a way to protect their exporters


From Belfast Telegraph