IMF warns over currency caps

The head of the IMF has posted a dire warning that a growing number of nations intent on capping the strength of their currencies is placing the global recovery at risk.

Today's warning came as several central banks looked ready to follow the Bank of Japan's (BoJ) lead in propping up their faltering economies.

Concerns that the US Federal Reserve is about to embark on another round of policy easing that could weaken the dollar, and China's polite refusal to let its yuan rise any faster, have pushed currencies to the top of the agenda at tomorrow's meeting of finance chiefs from the G7 industrialised nations. Few hold out much hope of any meaningful agreement at the G7 or the IMF meeting that follows. The dollar extended its losses yesterday, falling to an 8.5-month low against a basket of currencies and edging towards a 15-year trough against the yen.

The unexpected decision by the Japanese central bank on Tuesday to drop its interest rate to "virtually zero" and expand its balance sheet follows the Fed's move towards more unconventional easing. Bank of England officials will consider further stimulus today, while the central banks of Australia, Canada and New Zealand are among those holding fire on further interest rate rises. The renewed push for easier monetary policy comes as the IMF warns growth in advanced economies is falling short of its forecasts, ahead of its annual meetings in Washington.

The dilemma for policymakers is that their actions may do little to revive growth and end up roiling currency markets. "The BoJ is at the head of the pack," said Stewart Robertson, an economist at Aviva Investors in London, which manages about US$370 billion (Dh1.35 trillion) in assets. "It looks like a lot of others will follow. Whether it's right or not is another matter." Global stocks climbed on speculation that the central banks would follow the BoJ.

The Daiwa Institute of Research argued the BoJ is engaged in a "vicious spiral" of monetary easing with the Fed as both compete to bolster their economies. "The BoJ's next moves will depend on the Fed," said Maiko Noguchi, an economist at Daiwa in Tokyo. "The bank will have no choice but to steadily take easing measures." Ben Bernanke, the chairman of the Fed, and his colleagues have signalled they may announce the purchase of more treasuries as soon as their next policy meeting at the start of next month, to try to boost growth and reduce an unemployment rate stuck near 10 per cent for the past year.

"The irony is that the Fed is creating all this liquidity with the hope that it will revive the US economy," Joseph Stiglitz, a Nobel Prize-winning professor at New York's Columbia University, said yesterday. "It is doing nothing for the US economy and causing chaos for the rest of the world." The IMF managing director Dominique Strauss-Kahn was quoted in yesterday's Financial Times as saying: "There is clearly the idea beginning to circulate that currencies can be used as a policy weapon.

"Such an idea would represent a very serious risk to the global recovery … any such approach would have a negative and very damaging longer-run impact." On Monday, Brazil fired the latest shot in what it called an "international currency war", doubling a tax on foreign investors buying local bonds to 4 per cent to curb a strong real. Policymakers from emerging Asian economies that have seen their currencies rise to two-year highs have voiced growing concerns about the risk of a flood of speculative money.

South Korea warned investors it may impose further limits on forward trading and India and Thailand said they were looking at steps to control speculative surges.

* with Bloomberg and Reuters