Officials Urge System to Curb Currency Swings @sh#Experts at IMF Meeting Propose Central Fund to Stabilize Foreign Exchange
Kraus, James R., American Banker
The debate on a new global financial architecture took on a new twist at the 54th annual meeting of the World Bank and International Monetary Fund here this week, as senior finance officials and some bankers proposed introducing a system for managing foreign exchange fluctuations to help curb global economic volatility.
"The lesson emerging markets have learned from the most recent crisis is that when an emerging economy depends on another currency, and the exchange rate of that currency fluctuates, the result is chaos," said Toyoo Gyohten, senior adviser to the Bank of Tokyo-Mitsubishi Ltd. and president of the Institute of International Monetary Affairs, a Tokyo-based think tank.
Citing wild swings in the value of the dollar against the Japanese yen and the instability this has triggered for Southeast Asian countries that depend on export earnings and on dollar- or yen-denominated loans, Mr. Gyohten called on finance officials to set up a multistage plan that would set "permissible" levels of fluctuation for the dollar, yen, and euro against each other.
Addressing fund managers and bankers at a symposium Saturday that was sponsored by Deutsche Bank, Mr. Gyohten argued that setting up a managed system with an international fund for intervening in foreign exchange markets would help suppress "the kind of overshooting and misalignments" that have triggered financial crises over the last two years in countries including Thailand and Brazil.
In a similar vein, Fred Bergsten, director of the Washington-based Institute for International Economics, said that the majority of G7 industrialized countries are backing a managed currency system.
"I hope they get it,'' Mr. Bergsten said. "It's eminently feasible, and what we've got now is totally ad hoc."
Mr. Bergsten and others warned that managed exchange rates are becoming more crucial as the U.S. dollar is coming under increased pressure and that there is a growing the risk the Federal Reserve will again raise interest rates, triggering a U.S. economic slowdown.
This, officials warned, could have a disastrous impact on already hard-pressed emerging-market economies.
"Any change in Fed policies has a direct impact on financial flows to Latin America," said Enrique Iglesias, president of the Inter-American Development Bank. …