G-7 aim: Defuse currency-war fears

KIYOSHI OTA / Bloomberg
KIYOSHI OTA / Bloomberg
Posted: February 14, 2013

BRUSSELS - The Group of Seven leading industrial nations, which includes the United States, Japan, and Germany, warned Tuesday that volatile movements in exchange rates could adversely hit the global economy.

There have been increasing concerns around the world that countries might manipulate their exchange rates through their domestic economic policies in order to gain an edge. A lower foreign exchange rate can make a country's exports cheaper, thereby boosting growth. But one currency can fall only if another rises - which in turn will create trade problems for other countries.

This process could spark a "currency war" - a destabilizing battle where countries compete against one another to get the lowest exchange rate.

In a statement Tuesday on the Bank of England website, the G-7 finance ministers and central bankers insisted they remained committed to exchange rates driven by the market - not government or central bank policies - and would consult closely when it came to sharp movements in foreign currency markets.

The G-7 also counts among its members Canada, France, Italy, and the United Kingdom, its current president.

The statement comes ahead of a weekend meeting in Moscow of finance ministers from the world's top 20 industrial and developing countries. In light of the recent swings in the foreign exchange markets, notably relating to the Japanese yen, currency issues were expected to feature heavily during the Group of 20 discussions in the Russian capital.

Much of the recent volatility in foreign exchange markets has been a by-product of developments with the Japanese yen, which dropped Tuesday to its lowest level against the dollar since May 2010. Though the Japanese government has not directly intervened to get the value of the yen down, it has set in motion economic policies, such as setting a higher 2 percent inflation target for its central bank that many in the markets think will lead to more money being created.

The falling yen has contributed to the rising value of the euro, which could have a negative impact on the 17 European Union countries, already in recession, that use the single currency.

Japan insists it's not targeting a particular exchange rate, but there are fears that the benefits the country will potentially enjoy from the lower yen may force others to start using their currencies as an economic weapon.

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