Currency tensions persist as markets await Fed

By Aileen Wang and Tetsushi Kajimoto

BEIJING/TOKYO (BestGrowthStock) – Recriminations over currencies reverberated across Asia on Friday ahead of a speech by Federal Reserve Chairman Ben Bernanke, whose super-loose policies are blamed by China and others for triggering destabilizing capital flows.

Beijing kept up the heat on the United States, saying Washington should not make China a scapegoat for its own problems by constantly pressing for a swifter rise in the yuan.

Speaking hours before the U.S. Treasury Department is due to deliver its semi-annual assessment of whether China manipulates its currency, Commerce Ministry spokesman Yao Jian said it was not fair to criticize Beijing’s exchange rate policy simply by pointing to China’s trade surplus.

“Other countries have no right to comment on what is a reasonable level for a country’s trade surplus,” Yao told a monthly news conference.

U.S. data on Thursday showed America’s trade deficit with China swelled to a record high of $28 billion in August — grist to the mill of U.S. politicians who say that China keeps the yuan artificially cheap to help its exporters.

China’s central bank let the yuan edge up on Friday to 6.6438 per dollar, the highest level since it abandoned a peg to the dollar in July 2005, but U.S. critics say it is still 20 percent or more undervalued.

Sniping over what exchange rates are appropriate to put the world economy back on course for more balanced growth is intensifying ahead of a pair meetings of the Group of 20 leading economies in South Korea.

Finance ministers meet next week in Gyeongju to prepare for a summit of G20 leaders in Seoul on November 11-12.

LOGGERHEADS

Japanese Finance Minister Yoshihiko Noda stressed that countries must work together to strengthen the global currency order. Governments would find it tough to cope with the current environment on their own, he told reporters.

Noda struck a more conciliatory tone than on Wednesday, when he criticized South Korea, for intervening repeatedly to hold down the won, and China, for dragging its heels in letting the yuan rise.

“Before saying this or that about other countries’ currency policies, we must do what we should do. It is important to understand each country’s policy efforts first,” Noda said.

Yao, the Chinese Commerce Ministry spokesman, was in no mood to forgive or forget. Japan has “no reason, no grounds and is not qualified” to criticize China’s currency policy, he said.

Some South Korean newspapers weighed in too, saying Japan risked sacrificing friendly diplomatic relations with its neighbors to placate its export companies, which are suffering due to the yen’s rise to a 15-year high against the dollar.

The dollar fell on Thursday to its lowest level this year against a basket of currencies as the conviction hardened that the Fed will further ease monetary policy next month to try to kick-start the lethargic U.S. economy.

WAITING FOR BERNANKE

Financial markets, which expect the U.S. central bank to begin a second round of buying of longer-term U.S. Treasury bonds at its November 2-3 meeting, will hang on Bernanke’s words for clues about the scope of the Fed’s so-called quantitative easing.

Bernanke is due to talk at 1215 GMT at a Fed conference in Boston.

The Fed’s policy remit is domestic, but a side-effect of minting new dollars to pay for the asset purchases is a weaker dollar and investors’ rush into emerging markets, where growth prospects are brighter and yields are higher.

Capital inflows are a vote of confidence. But they can be volatile and, because they drive up exchange rates, they are a headache for governments that rely on exports to create jobs.

“With the recovery slow in the advanced countries, each country relies more on exports for growth and tension surrounding foreign exchange rates is intensifying,” Finance Minister Yoon Jeung-hyun said on Friday. “There are signs that this could develop into trade protectionism.”

Singapore decided on Thursday not stand in the way of market forces and said it would let its dollar rise more quickly. It duly hit a record high against the U.S. currency.

But India intervened to temper a rising rupee, while South Korea tried to deter unwanted inflows by keeping interest rates steady even at the risk of allowing inflationary pressures to build.

For its part, Thailand this week imposed a withholding tax on foreign purchases of government bonds. But the new governor of the central bank said Bangkok would be wary about further steps.

“It’s normal that we have to prepare our menu list, our measures in hand. But stringent measures will have side effects, so what to use and when, we have to look at the real situation,” Bank of Thailand Governor Prasarn Trairatvorakul said.

(Writing by Alan Wheatley; Editing by Tomasz Janowski)

Currency tensions persist as markets await Fed