G7 fails to defuse currency tensions

A man watches the foreign currencies exchange rate at a bureau de change in Rio de Janeiro, Brazil, on January 5, 2011.

Story highlights

  • Attempt by Group of Seven nations to ease fears of global currency war backfires
  • Japanese yen first fell but rose after G7 official said statement was warning
  • Britain said statement was not targeted at any individual country, currency
  • Japan's attempt to end deflation by weakening yen is alarming trade partners

An attempt to soothe global currency tensions backfired on Tuesday as a joint statement by the world's richest nations roiled the markets.

The Group of Seven nations took the unusual step of issuing a public statement to address rising concerns over a fresh round of global "currency wars".

The yen initially fell, as the statement appeared to support Japan's efforts to reinvigorate growth. But the currency later rebounded after a G7 official was quoted in Washington as saying the statement had been "misinterpreted" and was instead intended as a warning to Japan.

British officials, who brokered the statement, meanwhile insisted that the statement was "not about an individual country or currency".

Japan's monetary policy has become the focus of the global currency tensions ahead of a meeting of G20 finance ministers and central bankers later this week in Moscow. Expectations that Tokyo will take firm action to combat deflation have led to a sharp sell-off in the Japanese yen, alarming the country's trading partners.

Lael Brainard, the top US Treasury official for international affairs, sent the yen plummeting on Monday evening after commenting publicly that the US supported "the effort to reinvigorate growth and end deflation in Japan".

The dollar gained further ground after the G7 statement was published in London on Tuesday. The statement -- from finance ministers and central bank governors in the US, Japan, UK, France, Germany, Italy and Canada -- said they would "consult closely" on any action in foreign exchange markets.

"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates," the ministers and governors said. "We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability."

But an unidentified official from a G7 country later said the statement had been misinterpreted. "The G7 statement signalled concern about excess moves in the yen," the official told Reuters in Washington. "The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend."

The dollar promptly gave back its earlier gains against the yen, falling back to Y93.2 in a volatile day on the currency markets.

In private, the US has been pressuring Japan's new government to refrain from mentioning the yen as it attempts to revive growth and end deflation. The US Treasury refused to comment.

As G7 unity crumbled, the Bank of Canada's governor said the world's richest economies should not use monetary policy to target exchange rates. "It is extremely important ... that we as a G7 go in united and forcefully to the G20 to enlarge that commitment as quickly as possible amongst the major emerging economies in the G20," said Mark Carney, who will take over as Bank of England governor later this year.

Leading emerging economies, such as Brazil, have complained about loose monetary policy in G7 countries, leading to warnings about an outbreak of low-level "currency wars".

The Japanese yen weakened rapidly after the election of a new government in in December. Japanese officials have stated that the country's monetary policy is not intended to devalue the yen.