G7 intervenes to defuse currency tensions

By Alice Ross in London

The world’s largest developed nations reaffirmed their commitment not to target exchange rates in a statement on Tuesday aimed at addressing concerns over a fresh round of global currency wars. 

In a move widely seen as an attempt to defuse tensions over recent rapid moves in the currency market, the Group of Seven countries – comprising the US, the UK, France, Germany, Italy, Canada, and Japan – said they would “consult closely” on any action in foreign exchange markets. 

“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the ministers and governors said. 

The Japanese yen weakened after the statement was released as investors took the statement, which reaffirmed existing commitments without adding anything new, as a sign that the developed nations would not interfere with Japan’s plans to kick-start its economy. 

“The G7 has avoided criticising Japan, and that will give everyone a green light to go on selling the yen,” said Kit Juckes, a strategist at Société Générale. “But we’ll have to see what Asian countries who are more affected by this say later in the week.” 

The statement by the G7 comes ahead of a meeting of Group of 20 finance ministers and central bankers in Moscow on Friday, amid speculation that Japan could come under criticism for its plans to boost its own economy through an aggressive monetary stimulus programme. 

The Japanese yen has weakened at a rapid pace that has alarmed policy makers in other countries after the election of a new government in Japan in December that has promised to get tough on deflation. 

Japanese officials have stated that their intention has not been specifically to weaken the yen, in line with an agreement between the G20 nations formed in 2010 that said member states should not engage in competitive devaluations of their currency. 

The statement on Tuesday was widely seen as an attempt to defuse tensions between some of the world’s largest economies, as clear policy divides have emerged as central banks try to boost sluggish growth in their own countries.

Mario Draghi, head of the European Central Bank, said last week that while the euro was not yet overvalued, the central bank was monitoring the strength of the currency, leading investors to expect a further rate cut in the eurozone. Copyright The Financial Times Limited 2013.