CURRENCY UNDER G20 SPOTLIGHT

COMMUNIQUÉ DROPS STANDARD PLEDGES

LONDON•A draft communiqué prepared for this week's gathering of G20 finance chiefs has dropped the group's standard pledges on the need for flexible yet stable exchange rates and orderly markets, suggesting it could prove a landmark event for currency markets.

The world's most powerful finance ministers and central bankers convene in the German spa town of Baden-Baden on Friday and Saturday, their first meeting since Donald Trump's U.S. election victory in November and his reaffirmation of an avowedly protectionist, ‘America First' stance on international trade.

Solid U.S. economic activity and rising inflation are pushing interest rates and the dollar higher. But the White House would clearly prefer a weaker currency to help U.S. exports, manufacturing and competitiveness on the global stage.

Figures on Tuesday showed the U.S. trade deficit in January was US$48.5 billion, the widest in nearly five years.

The draft communiqué seen by Reuters has removed references to “excess volatility” and “disorderly” FX moves from last year's statement, as well as a pledge to refrain from “competitive devaluations.”

It has also reintroduced — for the first time in more than 10 years — a reference to “excessive global imbalances,” an apparent swipe at hefty trade surpluses in Germany and China.

Taken together, these changes could be seen as another indication that Washington — without taking direct action or explicitly saying so — is resisting a strong dollar, which it blames for its stubborn trade deficit and manufacturing decline.

The draft communiqué remains subject to change. And there is unlikely to be any appetite for currency wars, so the pledge to resist “excess volatility and disorderly movements” and refrain from “competitive devaluations” could still get reinserted. Nevertheless, if the final document bears any resemblance to its current guise, it will be a clear sign that the new White House administration is flexing its muscles on currencies and trade.

“The wording of G7 and G20 statements has been used to justify specific actions or to send specific warnings in the past. If the wording sets the parameters for currency policy, it is therefore significant when it changes,” said Simon Derrick at Bank of New York Mellon.

G20 members are unlikely to want their own currencies to appreciate much, if at all. But the reintroduction of the phrase on “global imbalances,” at a time when trade is firmly back on the international agenda, “is clearly intended to send a strong message,” Derrick added.