Global finance leaders fail to disarm currency time bomb

Global leaders failed to defuse a growing currency war between western nations and Asian countries at meetings over the weekend. The deadlock sets the stage for further debate at talks next month between the Group of 20 (G20) leading and emerging economies over an issue that is being closely watched in the Gulf. The IMF said in a communique released after meetings in Washington that it would "deepen its work" on currencies and gave Dominique Strauss-Kahn, the head of the fund, a mandate to mediate disputes over currencies between the US, Europe, China and Japan. But the meetings dashed hopes when they failed to produce an accord between the warring parties.

"In a war, there is always a loser and in this situation there must not be a loser," Christine Lagarde, the French finance minister, said at the talks. Fears are rising that a skirmish of words pitting the US and Europe against China and other emerging economies in Asia will escalate into a battle that could lead countries to implement protectionist trade barriers. While the US and China have the most at stake, currency conflict could have wide-ranging effects for the Gulf, analysts say.

The main risk, they say, is if the dispute results in new barriers that staunch a burgeoning recovery in global trade. That could threaten a broader recovery for the region's commercial centres and for Dubai in particular. The IMF last week upgraded its forecast for economic growth in the UAE this year to 2.4 per cent from 1.3 per cent, citing high oil prices, Dubai World's US$24.9 billion (Dh91.45bn) debt restructuring agreement with 99 per cent of its creditor banks and a rebound in global trade.

"The interests of this region are in free trade," said Tim Fox, the chief economist at Emirates NBD. "The UAE is an open economy and trade was one of the factors that led the IMF to push up its forecasts for growth this year. To that extent I think the interests of this region are in the absence of things like currency wars, capital controls and protectionism that impinge on free trade." Fast-growing Asian countries want to keep the value of their currencies low against the dollar and euro, allowing buyers in Europe and the US to afford more Asian goods and giving a boost to the eastern continent's export-driven economies.

But the US and Europe are concerned that their own exporters are getting unfairly punished by Asian countries' interventions in markets to keep their currencies weak. The US has been putting pressure on China for months to allow its currency, the yuan, to fluctuate more freely against other global currencies. China in June dropped a temporary peg to the dollar and the yuan has since strengthened by 2.3 per cent against the US currency.

Coupled with Japan's recent intervention in markets to contain a rise in the yen, the yuan's modest strengthening has not gone far enough to satisfy the US, where legislators recently passed a bill imposing sanctions on countries found to be manipulating their currencies. The US Federal Reserve, meanwhile, is considering pumping dollars into the global financial system to stimulate its economy, a move not viewed favourably in Asia.

While trade dominates Gulf countries' concerns, they are also watching the currency wars because of their large stores of foreign assets bought with decades of oil savings. Few observers expect the region's sovereign funds to exercise political or economic sway in the debate but Sven Behrendt, the managing director of Geoeconomica, a political risk management company based in Geneva, said they had the latitude and size to do so.

"We estimate that the Gulf region holds an accumulated $1.3 trillion in foreign exchange reserves and financial assets in sovereign wealth funds," he said. "That is somewhat more than the foreign exchange reserves of Japan and more than half of China's foreign exchange reserves. That means the Arab world is a player in this currency war and as such will also determine how it is going to evolve." Central bankers from Switzerland and Canada also told bank executives at the weekend talks they could expect further regulation after the passage of new supervisory rules last month. The Basel III rules required banks to build bigger financial backstops to withstand crises, although the tougher standards were criticised by many observers as not going far enough to protect the global banking system.

Coming out of the IMF-World Bank meetings without a resolution, the next set of high-level talks where leaders could try to make peace are next month's G20 meetings in Soeul, South Korea. afitch@thenational.ae