The G-20 countries have frequently criticized the foreign exchange stance of fellow member China, with the U.S. one of the most vocal on the issue. Congress has even considered taking action through legislation. Now, the U.S. finds itself on the other side of the argument as many other G20 countries are criticizing the Federal Reserve’s $600 billion bond buying plan, which could further devalue the dollar. World leaders say the move breaks the vow of unity made during the last G-20 meeting in Toronto.
The dollar plays a special role in the global economy because many commodities, from oil to gold, are dollar denominated. Hence, any weakness in the dollar makes those commodities more expensive.
Officials from Germany, Brazil, China and South Africa were among those expressing concern ahead of the G-20 summit in Seoul Thursday and Friday. They accused the U.S. of joining the global currency war, saying that the Fed’s policy could weaken the dollar, drive up commodity prices and send cash into emerging markets, Reuters reported. This could result in inflationary asset bubbles in those countries, and push their exchange rates to uncompetitive levels against a dollar.
Since the last G-20 meeting in Toronto in late June, when leaders talked about “collective well-being” and “shared objectives,” the dollar has dropped 11% against a basket of currencies, driving up currencies in Japan, Canada, Brazil, the eurozone and elsewhere. With China pegging its currency close to the dollar, the dollar dropped a modest 2% against the yuan.
The American response to G-20 criticism was that the world needs a healthy U.S. economy, which means more U.S. exports. Most agree that the massive German and Chinese trade surpluses need to be reduced and better balanced achieved, but that doesn’t help emerging markets. And with Bloomberg reporting that Japan’s vice finance minister said the Fed’s move could contribute “tremendously” to global growth, the summit could see a bit more accord on the issue.
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