EU urges G20 to act to avoid currency war

October 29, 2010
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, BRUSSELS, Oct 29 – European Union leaders urged their Group of 20 counterparts Friday to avoid a currency war so as to prevent any return of damaging 1930s style trade protectionism.

Leaders adopted a declaration insisting that the G20 of major and emerging powers use their summit in South Korea next month to "avoid engaging in exchange rate moves aimed at gaining short-term competitive advantage."

The text "stresses the necessity to avoid all forms of protectionism" so as not to endanger the global economic recovery.

The call comes amid growing currency tensions, notably between the United States and China over the value of the yuan which Washington says is kept deliberately undervalued to boost Chinese exports at its expense.

Europe has voiced similar fears while Japan, and other Asian countries, recently moved to weaken their currencies to protect exports, sparking concerns of a return to the \’beggar-thy-neighbour\’ policies at the heart of the 1930s Great Depression.

The International Monetary Fund on Thursday said the dollar was overvalued while the euro, yen and pound were each in line with fundamentals.

"The real effective exchange rates of Japan, the euro area and the UK all appear broadly in line with medium-term fundamentals, while the US dollar is on the strong side of fundamentals," the IMF said in a report to the G20.

The IMF noted tensions among G20 members stemming from currency imbalances in part driven by large capital inflows to fast-growing emerging economies as investors seek higher-yielding returns.

Key emerging surplus economies, notably in Asia, have responded by seeking to limit the capital inflows, actions which contributed to "continuing significant exchange rate misalignments relative to fundamentals — for instance, the Chinese reminbi (yuan) remains substantially undervalued," it said.

Many emerging economies, however, including China suspect that the United States is deliberately allowing the dollar to flounder markets so that it can export its way back to prosperity.

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