Sunday, February 15, 2009

Change of heart on China by G7

After we hear from Treasury secretary Geithner that the Chinese are believed to be currency manipulators it was going to be interesting to see what the reaction would be from the G7. They have encouraged the Chinese to appreciate their currency. Well, the wording was actually softer this time with the G7 welcoming the fiscal stimulus from the Chinese with the expectation that the currency will appreciate. This was a softer tone that what has been used in the past. 

This tone may actually help avert a stepping-up of the rhetoric concerning currency rates. the focus seems to be on eliminating extreme currency volatility which is where the policy focus should be. 

It is imperative that the G7 tries to work as a unified front to continue free trade and open capital markets even though the natural tendency is for protectionism. The costs of a Smoot-Hawley tariff war are too great. 

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