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Trichet Sees G-7 Opportunity Window For Currency Accord

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Former European Central Bank President Jean-Claude Trichet said there is a “window of opportunity” for the world’s advanced economies to strike a fresh accord against competitive devaluations.

“Almost everyone seems to be saying, ‘taking everything into account, if my currency goes down it would be better -- in any case I would not like it to go up’,” Trichet said in an interview in Paris. “Maybe we have a sort of window of opportunity to go a bit further than we have in the stabilization relation between large convertible currencies.”

Trichet spoke out at the end of a year in which declines in the yen and euro sparked suggestions a new currency war is brewing as policy makers appear to be harnessing weaker exchange rates as a way of reviving inflation. At the same time, a soaring dollar is squeezing some emerging-market economies which borrowed in greenbacks or want to avoid an inflationary surge.

“This configuration I haven’t seen since the demise of the old Bretton Woods system at the beginning of the 1970s,” Trichet said. “Everyone is paying much more attention to the external value of their currency than before. The Japanese, the British, the Americans and the Europeans as well.”

Much will depend on how the U.S. views its currency’s rise. Treasury Secretary Jacob J. Lew said in Johannesburg on Oct. 29 that the strong dollar was a symptom of the strengthening economy, rather than posing a risk. Federal Reserve officials have differed over the challenges posed by an ascending dollar.

Trichet, who attended Group of Seven meetings over the course of three decades starting as a French treasury official in the 1980s, said his suggestion is specifically for currencies that make up the Special Drawing Rights basket at the International Monetary Fund. SDRs are currently comprised of dollars, euros, yen and the pound. They do not include the Chinese yuan.

The former ECB president said the basis for an accord is enhanced by the “conceptual convergence” of the central banks responsible for those currencies. They have now all adopted inflation targets of about 2 percent and have increasingly similar practices on limiting financial risks, surveying banks and even in the way the communicate through press conferences.

Next year marks the 30th anniversary of the Plaza Accord, an agreement among the world’s richest economies to push down the value of the dollar. It was followed two years later by the Louvre Accord aimed at supporting the greenback.

Since then, officials often shied away from attempting to directly move currencies because there is a limit to what they can achieve in a market now totaling $5.3 trillion a day. There have been limited occasional interventions, such as a 2000 effort to rally the euro and an attempt in 2011 to weaken the yen. Trichet played a role in both decisions as Bank of France governor in 2000 and at the helm of the ECB in 2011.

Trichet’s comment follows a suggestion this month by economists led by Stephen King at HSBC Holdings Plc (HSBA) who said “there’s a case for a global accord” to safeguard the U.S. expansion and reduce savings elsewhere.

Under their blueprint, the U.S. would offset a stronger dollar with monetary and financial stimulus, while China would reduce household savings by opening up capital markets and boosting consumer demand. Germany would raise its retirement age to encourage its population to save less and reduce a current-account surplus.

“These measures would both support demand in the near term while sustainably reducing the global savings glut,” the economists wrote. “However, while the economic logic is strong, political realities are likely to prevent such an accord being reached, suggesting that the world economy remains highly unstable.”


edit: link

Edited by R K

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  • 404 Brexit, House prices and Summer 2020

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