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Almunia urges action to avoid forex disorder

Analysis

The global economy might face disarray in foreign exchange markets, capital flight and trade wars unless world powers take action now, European Union Monetary Affairs Commissioner Joaquin Almunia warned on Monday.

Asian countries should take measures to boost domestic consumption and the United States needs to increase its savings, he said, repeating the concern within the euro zone about the strength of the single currency against the US dollar. “The world economy hangs in a precarious balance,” he told an economic seminar on Monday, referring to huge foreign currency reserves in many Asian and oil-rich countries that have helped finance a gaping US current account deficit. “A disorderly correction of global imbalances would have dire consequences for the global economy,” he said. “In today’s climate of volatile financial markets and slowing global growth, all partners must make a concerted effort.” These consequences could involve “wide fluctuations of exchange rates, and possibly capital flight, disruptions in international trade and mounting protectionist measures that would affect growth and prosperity around the world.”

Almunia again voiced concern about the strength of the euro against the US dollar and some Asian currencies, which have fuelled calls from some politicians, notably in France, to take protectionist measures in trade. “Ultimately, the marked appreciation of the euro against the dollar, the Japanese yen and the Chinese yuan does not fully reflect macroeconomic realities and one currency should not be bearing the brunt of global adjustment alone,” he said.

European Central Bank President Jean-Claude Trichet said earlier on Monday that the bank was concerned about excessive movements in currency exchange rates. The euro has soared against the dollar over the past week, hitting an all-time high near $1.5460 per euro as fears grew of a US recession and more Federal Reserve interest rate cuts. The euro has risen 5.2% against the dollar since the start of the year. Although the United States, China, Japan, the euro zone and oil-producing nations agreed nearly a year ago to tackle risks posed by global imbalances, progress so far has been slow, Almunia said. He said the euro zone should do its part in solving global imbalances by pushing ahead with structural reforms to boost growth potential and be able to absorb more imports. (Reuters)

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