The United Nations Conference on Trade and Development (UNCTAD) also said countries should manage exchange rates through a system allowing nominal exchange rates to be adjusted for inflation differentials.
It said this would help to ward off the danger of speculative bubbles and currency-related trade tensions, adding that speculative pressures were causing destabilizing currency inflows into some emerging countries.
Referring to increasingly vocal calls in the United States for China to revalue the yuan , UNCTAD said China had done more than any other emerging economy to stimulate domestic demand, with imports and private consumption rising fast.
Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe, the agency said in its monthly policy briefs report.
The World Trade Organization had been set up to manage the global trading system and the Basel accords set global standards for banking, UNCTAD said.
But the global monetary system has no such agreed regulatory system for enabling trading partners to avoid distortions stemming from financial shocks and, most importantly, exchange rate misalignments, it said.
CASINO BACK IN BUSINESS
UNCTAD, which in the run-up to the financial crisis warned repeatedly about the risks of unfettered markets, said speculation had revived since the crisis peaked, with countries facing huge inflows of hot money that distort prices and trade.
The global 'casino', nearly empty a year ago, is crowded again, and many new bets are on the table, it said.
With interest rates in rich countries close to zero, speculators were again using the 'carry trade', borrowing in currencies with low interest rates to invest in high-interest rate currencies such as those of Brazil and Hungary.
Appreciation of the real, which Brazil has countered by a tax on purchases by foreigners of its securities, and the forint had forestalled needed gains in competitiveness and could lead to overvaluation and new imbalances, it said.
UNCTAD acknowledged it would be hard to set up a constant real exchange rate system both technically and politically.
But the system, allowing nominal exchange rates to be adjusted for inflation differentials, would achieve crucial trade and finance goals, it said.
These goals included:
-- curb excessive carry trade currency speculation, because interest rate differentials would reflect inflation differentials
-- prevent unsustainable current account deficits and currency crises by excluding long-term currency overvaluation as a policy option
-- help avoid unsustainable debt by removing the tendency of countries to borrow more on the mistaken perception they have earned the confidence of financial markets
-- minimize the need to hold international reserves because reserves would not be needed to defend a currency but just to deal with the volatility of export returns.
An explicit exchange rate rule would remove incentives for speculation, it said.
Through a multilateral framework such as this, mutual recrimination over exchange-rate management and the threat of trade wars will give way to a more balanced and coherent discussion of the problems of an interdependent, and indeed very much 'coupled', world economy, it said.
(Editing by Stephanie Nebehay and Stephen Nisbet)