U.S. mad it's not alone in rigging currency markets

Paulson Says
IMF Must Address
Currency Manipulation

By Kevin Carmichael
Bloomberg News Service
Saturday, April 14, 2007

http://www.bloomberg.com/apps/news?pid=20601087&sid=acP6Kme8MoaY&refer=home

WASHINGTON -- U.S. Treasury Secretary Henry Paulson stepped up his push for rule changes that would allow the International Monetary Fund to monitor and disclose cases of countries that manipulate their currencies, calling for action "very soon."

"Reform of the IMF's foreign-exchange surveillance is the linchpin" of needed changes in the 63-year-old fund, Paulson said today in a statement to the IMF's semi-annual gathering in Washington. "We look forward to action in this important area very soon after these meetings."

The Bush administration since September 2005 has urged the IMF to leave work such as development lending to others and refocus on ensuring currencies aren't manipulated to fuel exports. Paulson is under pressure from lawmakers to address what many economists say are artificially weak exchange rates in countries including China, after the U.S. trade gap widened to a record last year.

The 185-member fund, under Managing Director Rodrigo de Rato, is studying a rewrite of the exchange-rate framework it laid out in 1977. Paulson said it should focus on "fundamental exchange-rate misalignment" and the "dramatic" rise in global capital flows.

At the conclusion of its meeting today, the fund's shareholders directed de Rato give "priority" to the overhaul initiative, including an update of the 1977 Decision.

As de Rato pursues new guidelines, he should avoid new obligations, keeping "dialogue and persuasion" as the main approach to surveillance; take into account a country's unique situation, emphasizing "evenhandedness"; and retain "flexibility" so the IMF can adjust its monitoring as economic conditions change, the fund said in a summary of their discussions.

Asian nations have been at the forefront of international concern about undervalued exchange rates. Countries including China, South Korea and Taiwan run trade surpluses with the rest of the world and have amassed record currency reserves as they managed their exchange rates.

China's reserves surpassed $1 trillion as the country's trade surplus swelled to a record $177.5 billion last year. At the same time, the yuan gained just 3.4 percent against the dollar last year, compared with an 11 percent surge in the euro and a 14 percent climb in Britain's pound.

A U.S. Treasury study last month concluded that Asian nations are accumulating reserves in excess of what they need to guard against financial crises. Countries from the region began stockpiling reserves in the past five years after they recovered from the Asian financial crisis in 1997-98.

For Paulson, persuading the IMF to crack down on exchange-rate manipulation may help head off deeper trade tensions with China. The U.S. Congress is considering at least five bills aimed at slowing imports from China and the Commerce Department last month imposed sanctions on Chinese paper products. China's Commerce Ministry said the U.S. actions "seriously damaged" Chinese interests and refused to rule out retaliation.

The Group of Seven richest countries in a statement yesterday reiterated their call for emerging-market nations -- "especially China" -- to allow greater flexibility in their currencies.

The G-7 finance ministers and central bank governors said following a meeting in Washington that "it is desirable that their effective exchange rates move so that necessary adjustments will occur" in international trade balances.

Some developing nations are skeptical of the U.S.-led initiative at the IMF. The Group of 24 countries, which includes Brazil and India, said in a statement yesterday that finance ministers in the group "remain doubtful" that a rewrite of the 1977 Decision is "necessary to pursue the objective of more focused and effective surveillance."

Paulson's Treasury advocates a deal at the IMF that would raise the influence of developing nations at the same time as increasing the fund's oversight of exchange rates. He said in his statement that the U.S. continues to offer forgoing any gains in IMF voting share in the next round of increasing the finance agency's funds.

Still, Paulson's statement made clear that more vigorous surveillance of exchange-rate policies at the fund was the U.S.'s priority.

"Let us be clear," Paulson said. "Exercising firm surveillance over members' exchange-rate policies is the core function of the institution."

Canadian Finance Minister Jim Flaherty backed Paulson today, telling the fund that its dated exchange-rate guidelines are making it "increasingly difficult to guide surveillance activities and to hold the fund accountable."

The deadline for final proposals for the IMF overhauls is October. De Rato was given a mandate for the changes by the fund's members a year ago.

Tim Adams, the outgoing Treasury undersecretary for international affairs, started the U.S. campaign for changes at the fund in a Sept. 23, 2005 speech.

"We understand that tough exchange rate surveillance is politically difficult for the IMF; it is also true that a country has the right to determine its own exchange rate regime," Adams said at the time. "Nevertheless, the perception that the IMF is asleep at the wheel on its most fundamental responsibility -- exchange rate surveillance -- is very unhealthy for the institution and the international monetary system."

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