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Senators draft legislation for currency intervention by U.S.
Bill Seeks New Approach
to U.S. Currency Battles
Financial Times, London
Wednesday, May 30, 2007
http://www.ft.com/cms/s/ac32a5fc-0ece-11dc-b444-000b5df10621,dwp_uuid=5a...
U.S. Senate leaders are close to finalising legislation that they hope will lead to a reversal of long-standing U.S. policy of opposing intervention in currency markets, according to people familiar with the matter.
The Senate bill is to be introduced in the next month and will put pressure on the U.S. Treasury to intervene in global markets if currencies become fundamentally "misaligned," people involved in the process said.
The consensus in Congress in favour of currency legislation hardened after talks with China led by Hank Paulson, the Treasury secretary, failed to secure big concessions on trade and foreign exchange imbalances.
The bill has not been finalised but details are emerging as Democrats and Republicans seek to build a veto-proof majority. The legislation is an attempt by a bipartisan coalition of Senate leaders to correct what they view as tactical and strategic failures in U.S. international economic policy over the past decade.
For the past four years the Bush administration has opposed intervention in currency markets in keeping with a wider attempt to isolate and press China into embracing exchange-rate flexibility. But congressional leaders argue the effort has failed to sway Beijing and has inhibited co-ordinated policy action through the Group of Seven industrialised nations over other weak currencies such as the yen.
The U.S. has not intervened in currency markets since 2000 and has thwarted coordinated action by European ministers at the G7. Mr. Paulson is almost certain to refuse to change this stance.
Analysts said the administration was likely to resist pressure to shift its stance on currency intervention now but would find it ever more politically costly to rely on a strategy of persuasion with China.
Members of Congress want the option of market intervention reopened generally and a more direct challenge of China over its currency, despite the risks of igniting a trade war.
The bipartisan bill is likely to set the stage for a new case to be brought at the World Trade Organisation against Beijing that claims it is not meeting its international obligations and that China's weak currency acts an unfair export subsidy.
Congressional aides are understood to be crafting an approach that would shift the emphasis to the WTO from the International Monetary Fund.
Fred Bergsten of the International Economic Institute said he expected the bill to point toward a case aganist Beijing that sought to define China's weak currency as an unfair subsidy and looked to the IMF to measure the extent of the undervalutaion.
"A ruling that the currency was undervalued by 10 percent could mean a tariff of 10 percent on all Chinese exports," Mr. Bergsten said. He added that if the U.S. brought the case, it was more likely to be resolved through consultations than a WTO ruling.
The latest working draft of the currency legislation is more moderate than many observers expected and does not include recourse to unilateral tariffs on Chinese goods.
But the inclusion of a new trade case against China goes well beyond an earlier proposal by Max Baucus, the chairman of the Senate Finance Committee, and Charles Grassley, his Republican counterpart.
The senators have toughened their stance in response to pressure from Democrat Charles Schumer and Republican Lindsey Graham, analysts said. Brian Pomper, a former Senate aide now at Parven Pomper Schuyler, the lobbyists, said: "It is about the people in the room. Schumer and Graham are acting as a crucible for good, creative approaches that pass muster."
Adam Posen, a monetary expert, said: "Responsible people in the Senate are trying to thread the needle between the status quo -- inaction -- and more radical steps."
But he added there was a risk the bill would start as a "well-crafted compromise" but that unforeseen measures would be added.
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