Policymakers aim to fend off 'currency war' at G20 summit

Foreign exchange policy will take centre stage this weekend as the G20 meeting of finance ministers draws to a close.

Policymakers are hoping to fend off a currency war when they meet in Seoul. According to leaked papers they will try to persuade figures from the 20 nations not to race to devalue their currencies in order to gain an export advantage on their rivals.

It is expected finance leaders from each country will be urged to agree a form of market-driven exchange rate system as well as refrain from competitive undervaluations.

Werner Gey van Pittius, portfolio manager and emerging market debt analyst at Investec Asset Management, believes a fully-blown currency war is unlikely. But he feels countries vying to devalue their currencies does pose a threat to growth.

‘This has the very real potential to damage world trade and increase inflation, thereby hurting real incomes of consumers and ultimately threatening world growth in an already fragile environment,' he said.

The weekend's debate stems from fears surrounding how much China will devalue its currency – not whether it will – the corresponding response of emerging markets to huge capital inflows and the developed markets' intervention to curb currency strength.

Timothy Geithner, the US treasury secretary, has already announced he would like to agree a ‘fair’ exchange rate rule. He told the Wall Street Journal this could help the G20 nations move toward a set of norms on exchange rate policy.

However, the Chinese fear a sudden change could force a number of exporters in to a state of collapse.