- Associated Press - Saturday, October 9, 2010

WASHINGTON (AP) — Differences that threaten the outbreak of a currency war persisted after a weekend meeting of global finance ministers, who left without resolving what to do.

They did agree, however, that the 187-nation International Monetary Fund was the organization best suited to deal with rising global currency tensions that risk overshadowing next month’s summit meeting of the Group of 20 nations in South Korea.

The G-20 includes traditional economic powers such as the United States and European nations along with fast-growing economies such as China, Brazil and India.

Various nations are seeking to devalue their currencies as a way to increase exports and jobs during hard economic times. The concern is that such efforts could trigger a repeat of the trade wars that contributed to the Great Depression of the 1930s as country after country raises protectionist barriers to imported goods.

“Currency disputes can easily become trade disputes,” Canadian Finance Minister Jim Flaherty cautioned.

The International Monetary Fund ended two days of talks Saturday with a communique that pledged to “deepen its work” in the area of currency movements. This plan included giving the head of the IMF, Dominique Strauss-Kahn, a mandate to operate as judge, arbiter and analyst in dealing with the main players in the currency dispute, the United States, the eurozone, China and Japan.

The communique essentially papered over sharp differences on currency policies between China and the United States.

French Finance Minister Christine Lagarde said that a successful resolution of the currency dispute with China would require a cooling of overheated rhetoric about currency wars.

Noting the potential for broader ramifications, Ms. Lagarde added, “In a war, there is always a loser, and in this situation there must not be a loser.”

The Obama administration, facing November elections at which high U.S. unemployment will be a top issue, has been pressing China to move more quickly to allow its currency to rise in value against the dollar.

American manufacturers contend the Chinese yuan is undervalued by as much as 40 percent, and this undervaluation has cost millions of U.S. manufacturing jobs by making Chinese goods cheaper in the United States and U.S. products more expensive in China.

China has allowed its currency to rise in value by about 2.3 percent since announcing in June that it would introduce a more flexible exchange rate. Most of that increase has come in recent weeks after the Obama administration began taking a more hard-line approach and the U.S. House passed tough legislation to impose economic sanctions on countries found to be manipulating their currencies.

Chinese officials continued to insist that their gradual efforts to revalue their currency was the best approach to take.

China will move the exchange rate gradually,” Zhou Xiaochuan, head of China’s central bank, said during a panel discussion Friday. “We will do it in a gradual way rather than shock therapy.”

Chinese officials have said that allowing the currency to rise too rapidly would cost thousands of manufacturing jobs and destabilize the Chinese economy.

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