On Wednesday, US Treasury Secretary Timothy Geithner warned emerging economies of the dangers of currency manipulation and its adverse effect on global economy in an indirect reference to the emerging “currency war”. He strongly advised emerging economies to progress toward more flexible and market based currency exchange system.
Geithner address at the Brookings Institution, ahead of important global semi-annual meetings of International Monetary Fund and World Bank this weekend, was severely critical of currency devaluations calling it a systemic global risk.
Geithner’s interpretation is part of United States’ aim to position itself at the meetings this weekend as a key player in restoring global economic growth.
“This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages outer countries to do the same,” Geithner argued pointing to China’s rejection to let yuan climb to its fair market rate.
China is accused of keeping its yuan artificially low to maintain its low-cost exports to United States and the rest of the world that in turn hurts US manufacturers and American workers.
In a bid to discourage currency manipulation, the US House of Representatives voted to expand Commerce Department’s powers to impose tariffs over currency manipulation last month.
In June China consented to move toward more exchange rate flexibility but it has not shown substantial movement since then.
“China will be less likely to move to allow its currency to rise more rapidly if it is not confident other countries will move with it. (And) It is unfair to countries that were already running more flexible regimes and let their currencies appreciate.”
Currency devaluation is more popular among countries who excessively rely on their exports; China-US trade imbalance is a result of it as it is cheaper to buy Chinese goods for American consumers than to buy American goods.
Geithner warned in his speech that currency devaluation strategy is feasible neither for the home currency nor for the trading partners, “As America saves more, countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off”.
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