IMF members commit to avoid the use of currencies as a trade weapon

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<pre><pre>IMF members commit to avoid the use of currencies as a trade weapon

NUSA DUA, Indonesia (Reuters) – China's highest central banker promised on Saturday to keep the yuan rate broadly stable, a sign that Beijing might try to prevent a trade dispute with the US into a currency war.

IMF Managing Director Christine Lagarde (CF), Governors and Finance Minister pose for a group photo at the International Monetary Fund – World Bank Annual Meeting 2018 in Nusa Dua, Bali, Indonesia 13 October 2018. REUTERS / Johannes P. Christo

Chinese Central Bank President Yi Gang's statement to the annual meetings of the International Monetary Fund and the World Bank in Bali came when US Treasury Secretary Steven Mnuchin said Chinese officials told him that another yuan devaluation was not in China's interest.

Mnuchin reiterated his concern that a sharp yuan decline this year against the dollar could be part of an effort to maintain a trade advantage for Chinese exports or to offset the impact of US tariffs.

The yuan [CNY=CFXS] Since the end of April, it has fallen more than 8% against the dollar, to around 6.91 on Friday, close to the psychologically important 7.0 mark, which did not exist in a decade.

"China will continue to make the market play a crucial role in forming the RMB exchange rate," Yi said in a statement issued on Saturday by the International Monetary and Financial Committee (IMFC). "We will not make a competitive devaluation and will not use the exchange rate as a tool to deal with the frictions of the trade."

His statement reflects the commitments made in a statement by IMF member countries on Saturday to intensify the trade dialogue with rising tariffs and higher borrowing costs threatening to overthrow global growth. In the opinion of the IMF Steering Committee, member countries also agreed to discuss ways of improving the World Trade Organization so that trade disputes can be better addressed.

"We recognize that free, fair and mutually beneficial trade and investment in goods and services are key drivers for growth and job creation," the IMFC said in the statement.

"We will refrain from competitive devaluations and use our exchange rates for competitive purposes," he added.

US Treasury Secretary Steven Mnuchin speaks at an annual meeting of the International Monetary Fund in an interview with Reuters – World Bank 2018 in Nusa Dua, Bali, Indonesia, October 12, 2018. REUTERS / Johannes P. Christo

RATE WALKS

On Thursday, IMF Managing Director Christine Lagarde warned countries against participating in monetary and trade wars that would affect global growth, as well as "innocent bystanders", including emerging markets that supply commodities

Some of these countries, including Indonesia, hosting IMF and World Bank meetings, are already fighting to stem capital outflows triggered by higher interest rates in the US.

Fears that interest rates could rise sharply – and international trade tensions – sparked a sharp sell-off in global equity markets last week.

The Governor of the European Central Bank, Mario Draghi, warned on Saturday that a "setback" of interest rates and a strong revaluation of asset prices were the biggest risks to the economic outlook.

The International Monetary Fund (IMF) has touched on the Sino-US trade dispute this week, cutting global growth forecasts for 2018 and 2019.

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"The recovery is increasingly mixed and some previously identified risks have partially materialized," the IMFC communiqué said, warning of impending tariffs and runoff pressure.

The United States and China have been fighting for hundreds of thousands of dollars in compensation over the past few months, triggered by US President Donald Trump's calls for far-reaching changes in China's intellectual property, subsidy and trade policies.

Trump has often accused China of cheapening its currency in order to gain a trade advantage, Beijing claims. The US Treasury will publish a key report on currency manipulation next week.

Despite some assurances from the Chinese central bank on monetary policy, some analysts say the yuan's weakness will continue as there is no clear path in January to resolve the trade dispute between the US and China and higher tariffs.

"Customers in China are still unwilling to demand bottoming in the yuan," said Mansur Mohi-uddin, head of currency strategy at NatWest Markets, in a research note. "This, in turn, makes us cautious when we demand a global high of the dollar."

Further interest rate hikes by the Federal Reserve are likely to bolster the strength of the dollar and increase capital outflows in emerging markets

Bank of Japan Governor Haruhiko Kuroda said the Fed rate hike was "fundamentally good" for the global economy, though it was more cautious to escalate trading tensions because of the "rather unusual" magnitude.

Reporting by Leika Kihara; Processing of Sri Navaratnam

Our standards:The Thomson Reuters Trust Principles.

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