The U.S. dollar may come under renewed pressure from emerging market currencies and the euro after a meeting of the world's top finance officials failed to take concrete action on rebalancing global money flows.
Finance ministers and central bank governors of the Group of 20 major countries, meeting in Scotland at the weekend, launched a framework in which they will discuss how to reduce trade and savings imbalances between nations.
But their communique talked only in general terms about rebalancing economies, and implied they might not agree on specific policies for individual countries to adopt before the end of next year at the earliest.
The result may be a continuation of heavy fund flows into emerging markets, boosting currencies there. And central banks intervening to slow currency appreciation may keep investing much of the money they obtain in the euro, pushing up that currency too.
We're probably looking at fresh dollar weakness in the short term in the wake of the G20 meeting, said Kenneth Broux, senior markets economist at Lloyds TSB.
At the center of the currency issue is China's reluctance to permit appreciation of its tightly controlled yuan, which it has kept flat against the dollar since mid-2008.
That has prompted additional fund flows into emerging market currencies that do trade freely, such as the Brazilian real, which has soared over 30 percent this year. Last month, Brazil slapped a 2 percent tax on foreign investments in fixed income and stocks in an effort to slow the real's rise.
Last week, Brazilian officials said they would discuss this problem at the G20 meeting. But the G20 communique made no reference to the issue, and Brazil appeared to get little sympathy from a senior official of the International Monetary Fund, which is a key player in the global rebalancing campaign.
Youssef Boutros-Ghali, who chairs the International Monetary and Financial Committee, the IMF's policy steering committee, told Reuters that Brazil's tax was unlikely to work and that we should not be fixated on currencies.
Officials from several countries, including Brazil, Japan and Indonesia, urged China on the sidelines of the meeting to let the yuan move more flexibly.
But as a group, the G20 did not press China on the sensitive issue, G20 sources said. British finance minister Alistair Darling told reporters: We didn't discuss the renminbi. I think that's a question for China rather than us.
In fact, China appeared in a combative mood. Finance Minister Xie Xuren and central bank governor Zhou Xiaochuan, speaking to the official Xinhua news agency after the meeting, made no mention of the yuan and instead warned developed countries to focus on the quality of their own policies.
Xie said countries with global reserve currencies should work to maintain the currencies' value, to avoid destabilizing the global economy -- implying it was up to Washington, not Beijing, to resolve the issue of the weak dollar.
The silence on the yuan in Scotland suggested countries accepted the G20 was not a forum in which to press China. The other main global economic forum, the Group of Seven nations, last met in October; it did mention the yuan, but only in the softest terms, welcoming China's continued commitment to free up the yuan without referring to a timetable.
The G20 did publish a detailed, unprecedented timetable for countries to discuss the economic rebalancing that could eventually bring more stability to global currency markets.
In an appendix to the communique, G20 countries were asked to submit descriptions of their monetary, fiscal and other policies and plans to the IMF by the end of January 2010. The IMF would produce an analysis of the global economy by April.
G20 countries would then develop a basket of policy options in June, and G20 leaders would consider recommendations for policies at a summit in November 2010.
But this plan is clearly constrained by diplomatic sensitivities. For example, the appendix said that, in the first half of next year, the IMF would not recommend policies for specific countries but merely for groups of countries facing similar circumstances -- apparently ruling out an explicit recommendation to appreciate the yuan.
So in the short term, currency market trends look as if they will be left to continue, said Simon Derrick, senior currency strategist at Bank of New York Mellon in London.
It is hard to imagine a level playing field for currencies without resolving the issue of the yuan, he said.
(Editing by Kevin Liffey)