Flying Fur Time: "World Bank and IMF at odds over hot money flows"

The World Bank-IMF meetings, starting Friday in Washington, are going to be a humdinger.

World Bank and IMF at odds over hot money flows

By Stanley White and Leika Kihara

Thu Oct 7, 2010 12:28am EDT

TOKYO/WASHINGTON (Reuters) - Emerging economies should consider steps to contain fund flows that could cause currency rallies and asset bubbles, the World Bank chief was quoted as saying, but the International Monetary Fund called such actions "undesirable."

The contrasting views over capital controls come amid rising tension between emerging and developed economies over exchange rates, which is expected to be a hot topic at Group of Seven and International Monetary Fund meeting starting on Friday.

Western leaders are worried efforts by emerging economies to weaken their currencies could derail the fragile economic recovery. Officials from developing markets say ultra-low interest rates in rich countries are fuelling massive fund flows into their markets, pushing up their currencies and inflating prices of stocks, property and other assets.

World Bank President Robert Zoellick said emerging nations should consider various measures to control short-term capital flows, according to the Nikkei newspaper.

But IMF deputy managing director, Naoyuki Shinohara, said it was natural and welcome for money to shift into economies with strong growth and policymakers should not try to curb such flows or use intervention to defend specific currency targets.

"When there are occasionally volatile moves in the market, intervention cannot be ruled out," he told Reuters in an interview in Washington on Wednesday.

"But it's totally undesirable for a country to intervene consistently to keep currencies at a certain level."

[...]
Signs of a "currency war" are growing as major industrial nations want to keep their exchange rates weak to help their struggling exporters while emerging economies such as Brazil and South Korea are taking or planning steps to curb capital inflows.

Using exchange rates as a policy weapon to undercut other economies and boost a country's own exporters "would represent a very serious risk to the global recovery," IMF Managing Director Dominique Strauss-Kahn was quoted as saying in Wednesday's edition of the Financial Times.

Instead, nations with large trade surpluses should let their currencies rise to prevent a devastating round of competitive devaluation, U.S. Treasury Secretary Timothy Geithner said on Wednesday.

China, accused by the West of keeping its yuan artificially weak to support its exports juggernaut and the prime target of such advice, has repeatedly rebuffed such calls. On Wednesday, Premier Wen Jiabao told the European Union to stop piling pressure on Beijing to revalue the yuan, saying a rapid exchange rate shift could unleash social turmoil in China that would prove disastrous for the world economy.