♠ Posted by Emmanuel in Currencies at 10/05/2010 12:36:00 AMWell this is pretty much self-explanatory. Many are wondering about whether the Washington Consensus-era vogue of free-floating currencies is cut out for today's world. With the US showing no intention of easing on easy money policies and screwing over holders of their debauched currency, many developing countries have taken to propping up the dollar in fear of an outright dollar swoon that will severely damage their export competitiveness. Meanwhile, those in search of higher yield use the dollar as a funding currency to obtain higher-yielding ones in the developing world as dollar savings rates are near zero. Brazil's FinMin recently grabbed a lot of headlines by declaring that we're in the midst of an "international currency war," but it's certainly not far from the truth.
And so those wary of the (foreign exchange) market's corrective ability now envision another 1985 Plaza Accord-style agreement hammered out in the eponymous hotel pictured above. Whereas that deal involved the US and major trading partners Germany and Japan, the surplus-running countries are now more plentiful. There would be many more places at the negotiation table circa late 2010. And, instead of weakening an overly strong dollar, the objective many participants will likely have in today's world economy is a stable dollar that isn't going to get routed as to preempt the need for masive intervention now going on. From the Financial Times:
The world’s leading countries should agree a new currency pact to help rebalance the global economy, a leading association of financial institutions has urged. The Institute of International Finance, which represents more than 420 of the world’s leading banks and finance houses, warned on Monday that a lack of such co-ordinated rebalancing could lead to more protectionism. Charles Dallara, IIF managing director, said: “A core group of the world’s leading economies need to come together and hammer out an understanding...”You needn't ask me who the villainous economolesters are in this story.
Mr Dallara, who as a US official worked on the 1985 Plaza Accord which co-ordinated international action to strengthen the yen against the dollar, called for a more sophisticated updated version of such an agreement. This should include stronger commitments to medium-term fiscal stringency in the US and structural reform in Europe. “Exchange rate understandings are of little use on their own,” he said.
The institute also released its latest forecasts for net flows of capital to emerging markets, which showed a sharp upwards revision for 2010, with the previous estimate of $709bn rising to $825bn. The institute said that ultra-low monetary policy in rich countries was rapidly driving money into emerging markets in search of yield, risking destabilisation. “There is an environment of unilateralism and bilateralism, laced with contributions of isolationism and parochialism,” Mr Dallara said.
On Monday Robert Zoellick, World Bank president, said while a currency war was unlikely, “there are clearly going to be tensions” over the matter.