G20 means G7 no longer only game in town on forex

NEW YORK (Reuters) - Group of 20 leaders say they want to rebalance the world economy but getting them to accept a weaker U.S. dollar in the process could prove a lot to ask.

That's especially true now that the Group of 20, which includes emerging markets like China and India, has supplanted the Group of Seven rich countries as the forum for managing the global economy.

In fact, coordinating currency policy of any kind may get a lot harder if it requires getting 20 countries, with disparate interests and priorities, to pull in the same direction.

"It's tough to reach consensus on currencies in the best of times, but with more people at the table and more interests to pursue, it could make coordinated intervention more difficult to achieve," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

Take the case of rebalancing the world economy. That's viewed as a polite way of calling for a weaker U.S. dollar, since it would require debtor countries such as the United States to save more and exporters like China or Japan to spend more.

But that would involve major social and economic changes for countries like China, which has relied on a weak currency and exports to drive its phenomenal rate of growth. In other words, it's hardly something China would want to rush into.

The G7 -- the United States, Britain, France, Japan, Canada, Germany and Italy -- say they will still meet periodically, starting this weekend on the sidelines of an annual International Monetary Fund meeting in Istanbul.

But their ability to act quickly and decisively within the larger G20 may be diminished, particularly if China, with its war chest of $2 trillion in currency reserves, is not on board for any proposed changes.

Last weekend's G20 summit, with its rebalancing pledge, is a case in point. While exchange rates may have been discussed behind closed doors, there was no official mention of currencies, much less any coordinated action.

It was a far cry, for instance, from the 1985 Plaza Accord, named after the New York hotel where officials from the United States, Germany, Japan, Britain and France met and agreed to weaken the dollar against the Deutschemark and yen.

Barclays Capital strategist Steven Englander said that with so many different interests represented in the G20, references to currencies will be rare, "even if some of what they say has clear implications for exchange rates."

But agreement on policy objectives will carry more weight, he said, now that developing countries, which hold the biggest share of currency reserves and are having a growing impact on the world economy, are represented at the table.

UNILATERALISM

Still, some worry that a lack of coordination at the top will tempt countries to act unilaterally on exchange rates.

Indeed, many countries have not been shy about weakening their own currencies to protect their fragile economies.

Source: reuters.com