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Friday, September 24, 1999 Published at 16:03 GMT 17:03 UK


Business: The Economy

Currency co-operation

It is the rich country finance ministers who make the key currency decisions

During the IMF annual meeting there will be much discussion of currency cooperation, with the Japanese government calling for support for its policy of stablising the yen. But the IMF itself will probably not be directly involved. BBC News Online looks at the history of attempts at international coordination of the world's currencies.

IMF under scrutiny
  • Reforming the IMF
  • IMF vs. Private sector
  • Russia: IMF's Biggest Failure
  • Currency cooperation
  • When the International Monetary Fund was set up in Bretton Woods, New Hampshire, at the end of the Second World War, dealing with problems of the world's currencies was very much top of its agenda.


    John Moylan reports on the IMF annual meeting
    But the IMF was never given full powers to reconcile currency mis-alignments which might distort trade, especially when currencies became too strong.

    Instead, it could only lend to countries whose currencies and balance of payments got into difficulty.

    For the large industrial countries, the last time this happened on a significant scale was in the l970s, when IMF loans helped stabilise the lira and the pound sterling at the cost of some painful adjustments in Britain and Italy.


    [ image: Fighting the power of currency markets isn't easy]
    Fighting the power of currency markets isn't easy
    A key part of the Bretton Woods system, fixed exchange rates, had broken and no one could agree on how to restore order to the world's currencies. And the oil shock - steep increases in prices due to OPEC agreements - put pressue on economies around the world.

    After that turbulent decade, informal arrangements have grown up involving discussions between economic policy makers in the world's most important industrial countries.

    The Group of Seven meetings between the heads of state of Germany, France, Italy, the UK, the United States, Canada and Japan were originally designed to find a way to make the world's currency system more stable.

    By the 1980s these focused on the problem of the dollar, which was rising higher and higher, as the US central bank raised interest rates to counter the effects of big budget deficits.

    The high dollar made US goods expensive abroad, and led to a huge trade deficit.

    Protectionist pressures were rising, and investors in Europe were putting all their money into offshore dollar accounts which paid high rates of interest.

    From Plaza to the Louvre

    In September 1985 the finance ministers of the G7 countries met at the Plaza Hotel in New York City to agree a managed decline of the dollar.

    They were concerned to avoid any sharp drop in the dollar which could have caused panic. But they agreed that central banks around the world would sell dollars in order to lower its value.

    The plan proved successful, coupled with lower interest rates in the US and some attempts to get to grips with the US budget deficit.

    Two years later, meeting in the Louvre in Paris, the ministers agreed that the decline had gone far enough, and successfully stabilised the greenback.

    Target zones

    The success of the approach led some to suggest that permanent "target zones" should be adopted between the world's main currencies.

    The world's central banks would try to buy and sell currencies in order to maintain their broad value, with a range of around 10-20% on each side.

    That could boost world trade and prevent sharp changes that could destabilise financial markets.

    In Europe, the successful cooperation stimulated attempts to introduce a single currency, culminating in the Maastricht Treaty, in order to insulate EU countries from major currency misalignments.

    The most recent advocate of target zones was the former German finance minister, Oskar Lafontaine, who resigned after clashing with Chancellor Gerhard Schroeder.

    But target zones were rejected by most G7 governments - mainly because of the difficulty of trying to buck the currency markets, which trade $1.5 trillion of currency each day, far more than the reserves held by central banks.

    A yen for intervention

    That left the problem of the dollar-yen, which has been subject to dramatic fluctuations as the fortunes of the Japanese and US economies have ebbed and flowed.

    Early in the l990s, the US recession led to the yen rising strongly against the dollar until it reached ¥80 to the dollar - putting severe strains on Japanese companies who exported to America.

    But by 1998, the booming US economy and the "strong dollar" policy, coupled with more evidence of instability in Japan's banking system, brought the yen to an all-time low of ¥144 to the dollar.

    The US Treasury was forced to intervene, helping stabilise the currency in return for a commitment to banking reform.

    Now the yen is on the rise again, approaching ¥100 as disarray among Japan's policy makers grows.

    And again intervention is being called for by the Japanese government.

    The US, however, has reason to oppose such a plan, which would make Japanese imports cheaper again.

    Getting agreement among policymakers is often difficult.

    And it is usually the case the currency mis-alignments reflect more fundamental economic problems in the country concerned.

    Nevertheless, there are real risks that without coordination, world economic problems are made worse and spill over to other countries.

    It is that prospect that will keep finance ministers meeting for the foreseeable future.



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