- Associated Press - Thursday, October 7, 2010

PARIS (AP) — Fresh fears of a looming international currency war sent the dollar to an eight-month low against the euro Thursday as top world financial officials cautioned that competing devaluations of countries’ currencies could threaten the global economic recovery.

Warnings by International Monetary Fund Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet came as governments around the world are seemingly trying to gain trade advantage by keeping their currencies weak — what some consider a new wave of economic protectionism.

“I take very seriously the threat of a currency war, even a nascent one,” Mr. Strauss-Kahn said in an interview published in Friday’s edition of French newspaper Le Monde.

With the official aim of boosting growth, Japan and the U.S., among others, have implemented or are considering monetary stimulus that would lower market interest rates, thereby weakening the appeal of their currencies. Brazil has raised taxes on foreign acquisitions of its bonds to keep its currency down.

But the focus is largely on China, so far the most aggressive in keeping its national currency artificially weak. The U.S. and Europe complain this is costing them trade and jobs and have redoubled their efforts to push China to implement its months-old pledge to let the yuan appreciate.

European Central Bank President Jean Claude Trichet listens to questions during a media conference on the sidelines of an EU Asia summit in Brussels on Tuesday, Oct. 5, 2010. The 16 nations that use the euro are urging China to let the value of its currency rise to help stimulate global economic growth. (AP Photo/Virginia Mayo)
European Central Bank President Jean Claude Trichet listens to questions during a ... more >

The IMF chief said China’s currency was “at the root of tensions in the world economy that are becoming a threat,” and that China must speed up its currency appreciation “if we want to avoid creating the conditions for a new crisis.”

Also Thursday, the ECB’s head warned that excess volatility in exchange rates has “adverse implications” for economic stability.

Mr. Trichet said he agrees with U.S. authorities when they say that “a strong dollar is in the interests of the United States.”

The euro broke briefly above $1.40 for the first time in eight months as he spoke — more than 20 cents above multiyear lows in June. It rose as high as $1.4028 before slipping back to $1.3920 in late London trading.

Mr. Trichet said central bankers and officials will have an opportunity to discuss exchange rates during meetings in Washington, D.C., over the coming days.

“I would only say that, more than ever, I think that exchange rates should reflect economic fundamentals, that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability, and we will have an occasion to exchange views on that,” Mr. Trichet said.

Earlier, U.S. Treasury Secretary Timothy Geithner also stepped up pressure on Beijing to make more progress to let its currency fluctuate. In a speech at the Brookings Institution, Mr. Geithner said the United States would make currencies a major topic at international finance meetings this weekend in Washington.

Mr. Geithner said the IMF should play a bigger role in monitoring how countries manage their currencies.

“It is not good for the world, for the burden of solving this broader problem, the exchange rate problem, to rest on the shoulders of the United States,” he said.

In a report Wednesday, the IMF said that the global economy will require a balancing act: Countries with huge trade and budget deficits such as the United States will need to boost exports. And countries with big trade surpluses such as China must reduce their dependency on exports and boost domestic demand.

Story Continues →