FX tensions mount ahead of Fed’s Bernanke

By Mark Felsenthal and Nopporn Wong-Anan

WASHINGTON/SINGAPORE (BestGrowthStock) – Tensions over currencies and signs of uneven global growth sharpened on Thursday, sending the U.S. dollar to a new 2010 low the day before the Federal Reserve is expected to lay out options for supporting the anemic U.S. economy.

Singapore widened the trading band for its currency in response to market volatility and India intervened to temper a rising rupee, fresh signs of the stress that weak U.S. growth and the falling dollar are putting on emerging economies.

South Korea, host of G20 meetings in late October and November, fended off criticism over its currency policy from Japan. Their unusual spat highlights the anxiety over how to prevent differences over managing domestic economies spilling over into currency wars and trade rows.

Market attention is turning to Fed Chairman Ben Bernanke, whose policies were criticized by China this past weekend for destabilizing the global economy with super-low rates to support domestic growth.

Bernanke speaks at 8:15 a.m. EDT in Boston on monetary policy in a low inflation environment and could use the event to clarify the Fed’s path forward and calm markets.

An unexpected rise in U.S. jobless claims and a worsening U.S. trade deficit provided fresh evidence that the U.S. economy is struggling and may need help.

The U.S. Treasury Dept is also due to deliver a semi-annual report on whether it views China and other countries as manipulators of their foreign exchange rate.

A delay to the report or not mentioning China by name is probable ahead of the G20 meetings where policymakers are anxious to tamp down the U.S.-China row and the talk of a breakdown in global cooperation.

European Union Monetary Affairs Commissioner Olli Rehn cautioned on a visit to Moscow that disorderly exchange rate movements could have “very adverse implications” for economic and financial stability and pressed countries with undervalued currencies to allow them to appreciate.

European Central Bank policymaker Christian Noyer played down talk of a “currency war” but took a swipe at countries like China who are keeping their currencies from rising.

Further clarity over Fed policy could help ease some strains on the U.S. dollar, which is falling as money seeks higher yields in emerging nations.

“In these economies, policymakers’ concerns that their economies may not be able to absorb these inflows — and the fear that these flows may reverse at any time — are legitimate,” Deutsche Bank said in a research report.

In response, several governments have stepped into foreign exchange market (Read more about international currency trading. )s or tried to curb capital inflows, raising fears of protectionism that can hobble global growth.

India’s central bank bought dollars around 44.10 rupees on Thursday, dealers said, in what is thought to have been its first such intervention this year.

The Reserve Bank of India has been reluctant to intervene in currency markets but may have to again as foreign investors are expected to pour in billions of dollars to buy shares in the country’s largest-ever IPO, for Coal India.

Verbal jousting from policymakers has intensified in the run-up to a meeting of Group of 20 finance ministers in South Korea next week and a leaders’ summit in Seoul on November 11-12.

The United Nations Conference on Trade and Development (UNCTAD) warned that a recovery in global investment was now threatened by the specter of a currency war.

“We have seen recently fluctuations of major currencies in a significant manner. There is a danger of a currency war,” said James Zhan, director of UNCTAD’s investment and enterprise division.

As a result, foreign direct investment — a key source of finance for developing countries — is likely to stagnate this year at about $1.1 trillion, one quarter below its level in the years running up to the financial crisis, Zhan said.

DOLLAR HITS NEW LOWS

Singapore widened the trading band for the Singapore dollar for the first time since just after the September 11, 2001, attacks on the United States — a move analysts said gave it more flexibility to react to a tide of hot money flowing in.

That propelled the local currency to a record high and helped push the U.S. dollar to a new 15-year low under 81 yen, a 28-year low against the Australian dollar and its weakest level in over eight months against the euro.

The dollar extended losses versus the euro after data showed U.S. initial jobless claims rose more than expected.

Underscoring the currency strains, state media in South Korea reported Seoul had complained to Japan after Tokyo questioned its leadership of the G20 forum of major economies because of repeated intervention to curb the won.

Seoul was angered by unusually direct remarks on Wednesday by Japanese Finance Minister Yoshihiko Noda, who said emerging economies with current account surpluses, like China and South Korea, should let their currencies be more flexible.

“It is inappropriate to talk about a certain country’s foreign exchange policy unilaterally,” Bank of Korea Governor Kim Choong-soo told reporters.

Japan itself intervened in the currency market last month for the first time in more than six years to try to stem a rise in the yen that threatens its fragile economic recovery.

The next flashpoint will come on Friday, when the U.S. Treasury is expected to make a ruling on whether China is deliberately manipulating its exchange rate — a move that would enrage Beijing and make the prospect of any accord on currencies even more remote.

The United States has not formally branded China a currency manipulator since 1994 and a ruling against it would be a shock despite growing anger from U.S. politicians who accuse Beijing of “stealing jobs” by keeping the yuan artificially cheap.

Federal Reserve Chairman Ben Bernanke will deliver a keynote speech on monetary policy that will be pored over for signs he is about to restart the money printing presses, a move China and others say will flood the world with more liquidity, weaken the dollar and push emerging currencies yet higher.

The Chinese central bank, which keeps the yuan’s exchange rate on a short leash, let the currency creep up on Thursday to 6.6562 per dollar, the highest level since it abandoned a decade-old peg to the U.S. currency in July 2005.

Visiting Beijing, Senate Finance Committee Chairman Max Baucus said the upper chamber was poised to follow the House of Representatives and pass legislation to correct the undervaluation unless Beijing acted.

(Writing by Stella Dawson, Noah Barkin and Alan Wheatley, editing by Mike Peacock)

FX tensions mount ahead of Fed’s Bernanke