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IMF sees low risk of ‘currency war’

The risk of a global currency war is “low” but cannot be ruled out, IMF managing director Dominique Strauss-Kahn said on Tuesday, following a spate of currency interventions.

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Amid mounting anger that economic powers are pouring money into currency markets to make exports cheaper at the expense of rivals, Strauss-Kahn insisted the potential impact of an all-out currency war should give countries pause.

“I don’t feel today that there is a big risk of a currency war. But that’s part of the downside risk,” Strauss-Kahn told reporters in Washington.

“I think the probability is rather low, because everybody can understand that too big conflicts… will have a negative impact. Nevertheless it may happen.”

His comments come a day after Brazilian finance minister Guido Mantega vented his anger at the impact the rising Brazilian real has had on the country’s vital export sector.

“We’re in the midst of an international currency war,” Mantega said in Sao Paulo hinting that intervention could come soon. “This threatens us because it takes away our competitiveness.”

In recent weeks nearly a dozen governments from Colombia to Singapore have admitted to buying up local currency in the hope of driving down the price of the currency to make exports cheaper.

The dollar has fallen by about 25 percent so far this year against the Brazilian real.

“The talk of currency war is a bit exaggerated, I would say, but there is definitely a growing risk of a lower-level confrontation between countries trying to protect their exports in an unstable global economy,” said analyst David Gilmore of Foreign Exchange Analytics.

But the latest rumblings come against a background of heightened tensions between the United States and China over the value of the yuan and as country’s scramble to regain their competitive edge after the global economic slowdown.

The United States has complained for years that China has held down artificially the value of its currency, preventing it from rising to reflect the strength of China’s foreign exchange earnings from exporting, notably to the US market.

US lawmakers were expected to vote on Wednesday to introduce sanctions against China if the undervalued yuan is not allowed to rise against the dollar.

The legislation enjoys strong support from Democrats and Republicans some five weeks before November elections shaped by deep US voter anger at the sour economy and historically high unemployment hovering near 10 percent.

The currency issue now looks set to feature prominently when finance ministers and central bankers gather in Washington next week for the IMF’s annual meetings and at upcoming group of 20 summits in South Korea.

“I think it is one of the questions which will be very much discussed during the annual meetings and during the two meetings in Korea in October and in November,” said Strauss-Kahn.

But according to one former IMF official the Fund is at least partially to blame for the the ratcheting tensions.

“The IMF has abdicated its surveillance responsibilities, it is a free-for-all out there, you can do whatever you want,” said Morris Goldstein, former IMF official and member of the Peterson Institute for International Economics.

“If China can be intervening and and manipulating its exchange rate for seven or eight years in a row and the Fund does not say anything, then why shouldn’t everyone else do it?”

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