The US Federal Reserve’s decision to pump an extra $600bn into the economy has galvanized emerging market central banks into preparing defensive measures and sparked criticism from leading global economies.
The Fed’s initiative, in response to rising concern about the weakness of the US economy, has fuelled fears of a sharp drop in the dollar and a fresh flood of capital inflows into emerging markets.
China, Brazil and Germany on Thursday criticised the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows.
Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.”
Mr Mantega added: “You have to combine that with fiscal policy. You have to stimulate consumption.” Germany also expressed concern.
An adviser to the Chinese central bank called unbridled printing of dollars the biggest risk to the global economy and said China should use currency policy and capital controls to cushion itself from external shocks.
“As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,” Xia Bin wrote in a newspaper under the Chinese central bank.
Korn Chatikavanij, Thailand’s finance minister, said the Thai central bank had told him it was “in close talks” with regional central banks over measures “to prevent excessive speculation.”
The renewed tension is likely to complicate US efforts to get leaders of the world’s leading economies countries meeting in Seoul next week to press China to sign up to a new accord promising to limit current account balances.
Dan Price, partner at the law firm Sidley Austin and formerly George W. Bush’s White House representative at the G20, said: “The US may find it increasingly difficult to galvanize countries to push China on [renminbi] appreciation when many think the Fed’s quantitative easing policy is itself a major contributor to currency misalignment and imbalances.”
Neither the Federal Reserve nor the US Treasury commented on Thursday. The tension over exchange rates has created fears of a wave of protectionist trade and investment actions in response, a reaction that so far has been markedly absent from the global economy during the recession and recovery.
The World Trade Organisation, in association with other international institutions, released a regular report which said that new restrictions on trade, direct investment and capital flows had remained subdued.
But blocks on trade imposed since 2008, such as “anti-dumping” duties on imports deemed to be unfairly priced, are largely still in place.
The WTO said that the percentage of G20 imports now covered by such restrictions had crept up to 1.8 per cent. Pascal Lamy, director-general, warned on Thursday that tensions over currency could be the issue which finally unleashed a real surge in protectionism.
The Fed’s initiative, however, boosted markets, with equities rising in Europe, London and the US following the lead set in Japan, where the Nikkei 225 Average gained 2.2 per cent – its best day in nearly two months.
“The no-asset-market-left-behind approach is officially endorsed,” said Steven Englander, at Citigroup. “If the intention is that US households and investors buy US assets, there is also little to stop them from buying foreign assets as well.”
Oil hit a six-month peak above $86 a barrel and gold rallied to $1,883.7, just shy of its all-time peak. The euro hit $1.428, its highest since January. Measured against its major trading partners, the dollar has fallen more than 3 per cent this week.
Treasuries, the actual target of the $600bn, endured the most mixed trading. Initially sold in disappointment that the Fed was not buying more, they began to rally as analysts digested the Fed’s plans, which will involve it buying more seven- to 10-year notes than the Treasury will actually sell. Yields on benchmark 10-year Treasuries were down 7.7 basis points at 2.49 per cent.
