G20 statement to pledge commitment to market FX rates

Group of 20 finance leaders will pledge on Saturday to commit themselves to pursue market-determined exchange rates and refrain from "competitive devaluation" of their currencies, a G20 source said.

A communique to be issued at the conclusion of G20 finance ministers' and central bank governors' meeting will state: "We're all committed to moving toward market determined exchange rates that reflect underlying fundamentals and refrain from competitive devaluation," said an official, who spoke on condition of anonymity.  

A US official separately told Reuters the United States had no expectation its proposal of setting numerical targets on external balances would be mentioned in the G20 statement.

The US proposal, aimed at pressing countries with surpluses such as China to let their exchange rates rise, met with a cool reception on the first day of a two-day meeting meant to smooth the path for a G20 summit in Seoul on November 11-12.

The US official said Washington knew that including specific targets for imbalances at this stage would be rejected by a number of countries with structurally high trade surpluses, including Germany and major commodity exporters. But it helped focus the discussions which initially were in disarray, he said.

Speaking with knowledge of the night-long discussions, the source confirmed that the final statement would water down proposals on tackling external imbalances. "Persistently large imbalances would warrant an assessment,", the communique would state, he said.

Such an outcome is what other G20 officials had predicted, given the disparate views of the diverse group.
China was against any limits on imbalances, another G20 source said on Friday. He also said there was a "rift down the middle" on currencies and International Monetary Fund reforms, and the final statement would be "bland".

There was, however, broad agreement that "unilateral and uncoordinated responses" to shore up fragile economies could prove damaging for everyone, a source said.

In a letter read to fellow finance ministers of the G20 on Friday, US Treasury Secretary Timothy Geithner said countries should act to reduce their current account imbalances below a specified share of national output.

Japanese Finance Minister Yoshihiko Noda said Geithner, backed by host South Korea, proposed capping surpluses and deficits on the current account -- the broadest measure of trade in goods and services -- to 4 per cent of national output.

Noda also voiced scepticism. "We doubt whether rigid numerical targets should be set.

The criticism underscored the difficulties facing the G20 as it strives to put the world economy on a more stable footing and defuse currency tensions that economists fear could trigger trade wars.

While the G20 won praise for coordination of stimulus packages during the global financial crisis, its unity has been tested by low growth in rich countries and attempts by some emerging market economies to preserve export competitiveness by holding down their exchange rates.

Saudi Arabia, Germany and Russia are the G20 members with the biggest current account surpluses, but China is the chief culprit in Washington's eyes -- and the unspoken target of Geithner's proposals -- because of massive currency market intervention to keep a lid on the yuan.

Beijing has amassed $2.65 trillion in official currency reserves as a consequence, and prompted the U.S. House of Representatives to pass a bill threatening retaliation unless China lets its currency off the leash to reduce its huge trade surplus with the United States.

Chinese officials made no public comment, but a G20 source said Beijing was opposed to any communique that explicitly bound countries to limits on current account balances or any other form of rules on currency policy.

The source, with direct knowledge of the talks, said the group of rich and emerging economies was split not only on the question of currencies but also on how to give poorer countries more voting power at the IMF.

A US delegation official said the United States expected an agreement on the Fund's reforms would have to wait for next month's G20 leaders' summit in Seoul.