No need for G20 to tame forex markets after Brexit

US Treasury sees mkts in line with fundamentals

WASHINGTON, July 20, (RTRS): Foreign exchange markets are not “disorderly” in the wake of Britain’s vote to leave the European Union and there is no need for the Group of 20 major economies to broadly agree to tame them, the International Monetary Fund’s chief

economist said.

A number of currencies have fallen sharply against the dollar since the June 23 EU referendum in Britain, including the pound, the euro and China’s yuan, while the yen has also seen more volatility as well.

Maury Obstfeld, the IMF’s chief economist, said flexible exchange rates have acted as a buffer to shocks such as the Brexit vote, and most often provide important price signals that guide economic activity, allowing countries to pursue monetary and fiscal policies suited to their economic needs.

“So I sort of reject the premise that volatility needs to be tamed,” Obstfeld said in a news conference, adding that a G20 repeat of the 1985 Plaza Accord deal to stabilize currency rates was “simply not something that’s going to happen.”

He also said another Bank of Japan intervention to stem excessive yen strength - Japanese officials have described forex markets as “nervous” since the Brexit vote - would not be “necessary or useful” in boosting Japan’s moribund economy. While there may be a case for intervention when markets become,” Obstfeld said he has not seen such movements, including in Japan.

“We have seen some currency volatility in recent weeks, but we would not characterize conditions in the yen market as being disorderly conditions,” he said, adding that Japan was better off pursuing policies to increase wages, add fiscal stimulus and implement structural economic reforms.

Fundamentals

Meanwhile, the US Treasury believes foreign exchange markets are behaving largely in line with underlying economic fundamentals this week ahead of Group of 20 finance ministers and central bank governors, a senior Treasury official said.

US Treasury Secretary Jack Lew will nonetheless still emphasize the need for the world’s biggest economies to avoid competitive currency devaluations at the meeting in Chengdu, China, the official told reporters on a conference call.

The dollar has risen against a number of currencies buffeted by Britain’s shock vote to leave the European Union, including the pound, the euro and China’s yuan, which earlier on Monday fell below the psychologically important level of 6.7 to the dollar for the first time in nearly six years..

“As I look at foreign exchange markets today, there’s nothing that strikes me as being particularly out of line with the underlying fundamentals that I’m seeing or the history of these markets in the way they’ve behaved,” the official said.

The Treasury has made a point about currency markets not being “disorderly” to discourage unwarranted intervention by the Bank of Japan to reduce the yen’s value.

Asked if China’s yuan looked undervalued, the official said there has been downward pressure on the currency due to capital outflows from China, and US officials had emphasized the need for Beijing to move to a more market-determined currency. The “hallmark” of success in that area will be whether the yuan is allowed to appreciate again when capital flows shift inward, the official added.

Lew is traveling to the G20 meeting in Chengdu on Saturday and Sunday, but will stop first in Athens Wednesday and Thursday to discuss fiscal reforms with Greek Prime Minister Alexis Tsipras and Finance Minister Euclid Tsakalotos.