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IMF chief warns of exchange rate war

The head of the International Monetary Fund Dominique Strauss-Kahn has warned that Government’s risk a currency war if they try to use exchange rates to solve domestic problems.

Strauss-Kahn’s comments come on the back of news that the yen fell after the Bank of Japan engaged in its quantitative easing programme, which saw it cut its interest rates and propose a new fund to buy government bonds and other assets.

The yen dropped against the dollar on Tuesday after the BoJ announced the decision. Government bonds, stock and gold prices all rose on the consensus that the central banks of other leading economies would follow Japan in embarking on the latest round of quantitative easing.

Speaking to the Financial Times on Monday, Strauss-Kahn said: “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon. Translated into action, 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.”

The past few weeks have seen a number of leading economies take action to relieve upward pressure on their currencies. For example, Brazil recently threatened to hold down the real, and on Monday doubled a tax on foreign purchases of bonds in an attempt to reduce inflows.

Last week, Brazil’s finance minister Guido Mantega also warned of a currency war.

Strauss-Kahn said: “We have seen reports that some emerging countries whose economies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side. I don’t think that is a good solution.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I dont understand currency markets although i do understand the impact on overseas investments and how this can affect an individuals investment porfolio.
    If some knowledgeable person would care to explain (in simple & broad terms) how currency can affect trade and the impact on economies between countries ie Japan mentioned above, i would be very interested to learn.

  2. Dropping interest rates makes a currency less attractive to external investors, they sell it, value falls, price of exports become cheaper. assuming demand for exports price-sensitive, exports go up in both volume and home currency terms, balance of payents improved. Home country and exports happy, other countires less so and contemplate retaliation….

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