IMF Managing Director Dominique Strauss-Kahn.BENOIT TESSIER
As if on cue, the yen and euro surged against the dollar just as international finance officials gathered in Washington for talks on the world economy, adding to the pressure to calm down volatile currency markets.
Japan's currency jumped to a 15-year high on Thursday, and the euro climbed to its highest since February, providing real-time evidence of the economic forces that are straining the spirit of co-operation forged by the Group of 20 countries during the financial crisis.
In Frankfurt, European Central Bank President Jean-Claude Trichet expressed frustration with the euro's strength, telling reporters that "more than ever, exchange rates should reflect economic fundamentals."
With the European economy sluggish, and the continent's prospects still shadowed by this spring's sovereign debt crisis, the euro-denominated investments might appear an odd choice. But compared with the United States, where the Federal Reserve appears poised to create money to buy bonds with the aim of lowering interest rates, Europe is an attractive investment, especially after Mr. Trichet's ECB left its benchmark interest rate unchanged at 1 per cent on Thursday.
Unlike the financial crisis, which enveloped the world's economies almost simultaneously, major countries are recovering from the calamity at different speeds. This naturally demands policy responses that are tailored to domestic conditions. But there is growing unease that national governments are becoming too blinkered, responding to economic conditions in a spirit of self-interest, with disregard for the global economy. Dominique Strauss-Kahn, managing director of the International Monetary Fund, told reporters Thursday that he senses that the G20's commitment to co-operation is slipping.
This is most evident in foreign exchange.
One of the reasons there is so much upward pressure on the euro and the yen is because many faster-growing emerging market countries, led by China, are actively constraining the value of their currencies, either through direct market interventions or with taxes and other controls on investment.
That narrows the number of places international investors can go in search of yield. This is one of the reasons Canada's dollar is again flirting with parity even as the economy stumbles after a strong first quarter. Another destination is Australia, whose currency rose to a record against the U.S. dollar on Thursday.
But it's not only emerging markets. Japan last month intervened to weaken the yen for the first time in six years, and some have accused the Fed's leaning to another round of quantitative easing as a not-so-subtle bid to lower the dollar. Last week, Brazilian Finance Minister Guido Mantega declared that the world was in the middle of a "currency war."
"Many do consider currency as a weapon," Mr. Strauss-Kahn said. "That is not good for the global economy."
Finance ministers and central bank governors have done little over the past several days to disguise that currencies will be the hottest topic over the next few days, eclipsing other agenda items such as financial regulation and a recalibrating of governance at the IMF.
The reason officials, including Mr. Trichet and Mr. Mantega, are coming to Washington is for the annual meetings of the IMF and the World Bank, which begin Friday and carry on into the weekend. There will be lots of discussions on the sidelines. Canadian Finance Jim Flaherty plans to host a dinner for finance ministers and central bankers from the Group of Seven at the Canadian embassy on Friday. He also will convene a session with his counterparts from Commonwealth countries.
While there is agreement over the problem, a solution is more elusive.
Both Mr. Struass-Kahn, a former French finance minister, and World Bank president Robert Zoellick dismissed suggestions that the world's "core" economies hammer out a version of the 1985 Plaza Accord, under which the U.S., Japan, Germany, Britain and France agreed to a set of policies to weaken the dollar.
"We have more and different players now," said Mr. Zoellick, a senior U.S. trade official in the mid-1980s, adding that finance ministers might consider using the IMF or the World Trade Organization to sort out disputes over currency policies.
The IMF used its latest report on the global economy this week to propose that emerging market countries get together to agree on a gradual appreciation of their currencies. Timothy Geithner, the U.S. Treasury Secretary, suggested this week that the desire of China and other emerging market countries to be given a greater role at the IMF be tied to an agreement that they accept floating exchange rates, an idea that won backing from Mr. Flaherty and Mr. Strauss-Kahn.
"If you want to be at the centre of the system," Mr. Strauss-Kahn said, "it goes with having more responsibility" for taking care of the system.