PREVIEW: G20 finance ministers meet amid currency war threat - Monsters and Critics

Berlin - The world's top finance officials will meet this week in the South Korean city of Gwangju amid fears about a so-called currency war between the world's financial superpowers.

The two-day gathering of the Group of 20 (G20) finance ministers and central bankers, which starts on Friday, is meant to help set the agenda for next month's summit of G20 leaders in the capital Seoul.

But concerns about a ramped-up conflict over currency rates is threatening to cast a shadow over the meeting.

'It all seems to be about exchange rates and banking rules,' said Societe Generale chief European economist Klaus Baader, who believes that the real risk facing the meeting is that it might fail to ease the tensions gripping global foreign exchange (forex) markets.

Even worse, a further escalation in the forex rhetoric could even derail the Gwangju meeting, which is supposed to focus on a proposed overhaul of the international financial system - including talks on a financial-market transaction tax and tough new bank capital rules.

The tensions that have taken hold in forex markets follow the push by countries to bolster their national economic performances by weakening their currencies.
In particular, China has been under fire for some time from major industrialized states for maintaining a weak yuan as part of the Asian economic powerhouse's efforts to underpin its export machine.

Renewed conflict over the yuan could complicate G20 hopes of reaching an agreement next month on increasing the International Monetary Fund voting power and the representation of emerging economies like China.

United States lawmakers have already been threatening punitive action against China over its currency in the buildup to congressional elections on November 2.
'China will be fighting a defensive war and will make a tactical retreat in order to avoid a devastating war that it might have to fight alone and where everybody loses in the end,' said Danske Bank senior analyst Flemming Nielsen.

Ahead of this week's G20 finance ministers' meeting, China announced a 25-basis-point rise in interest rates amid official concern about inflation and an overheating property market.

The G20 leaders' Seoul summit will mark the fifth time that the heads of the world's major industrialized and emerging economies have come together since the implosion of the US investment bank Lehman Brothers plunged the world economy into its deepest downturn in about six decades.

But since the G20 leaders and their finance ministers last met in the middle of the year in Canada, worries have also re-emerged that the global recovery is losing its steam.

As a result, signs of faltering economic growth in the US, Japan and Britain have sparked speculation that the three nations' monetary authorities could be forced to unveil a new round of measures in a bid to rebuild economic confidence.

This year's G20 host, South Korea has also initiated exchange rate interventions to try to stem rises in its national currency, the won, so as to ensure that the country's exports remain competitive.

At the same time, however, the European Central Bank has indicated it plans to move in the opposite direction and phase out the monetary stimulatory measures it launched to shore up confidence in the 16- member eurozone economy following the global economic crisis.

The result has been to exacerbate currency market tensions, with the euro gaining ground against key currencies, notably the dollar.

Indeed, both the yuan and the euro have emerged as potentially the major losers of the current conflict over currencies.

As a consequence, both Japanese and European leaders have become more spirited in their criticism of the weak yuan, which has not helped to ease frictions in the run-up to the G20 meetings.

Formed in 1999 as a forum for finance ministers from the world major economies, the G20 was transformed into a gathering for government chiefs in November 2008 as the global economy braced itself for recession.

In addition, to the world's leading industrialized nations such as the US, Germany, Japan, Canada and France, the G20 also includes key emerging economies such as Argentina, Brazil, India, Indonesia, Mexico, Russia and China.

By Andrew McCathie Reuters Oct 19, 2010

PREVIEW: G20 finance ministers meet amid currency war threat - Monsters and Critics