IMF Says Currency Flows Reversing

Just three months after the biggest developing economies sold dollars to support their currencies, policy makers from Colombia to China are moving to weaken exchange rates and revive exports as the International Monetary Fund forecasts the slowest trade growth in three years.

Colombian Finance Minister Juan Carlos Echeverry urged the central bank on Aug. 3 to boost minimum dollar purchases from $20 million a day, saying the country needs “more ammunition” to drive down the peso in the global “currency war.” The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the yuan reference rate to the weakest since November, which according to Citigroup Inc. will create “headwinds” for other Asian currencies.

After spending more than $59 billion in foreign reserves in May and June to stem currency depreciation, developing nations are reversing policies as the European debt crisis outweighs the risk of faster inflation. South Korea and Chile may weaken exchange rates to make their exports cheaper, according to UBS AG. The IMF estimates global trade will expand at the slowest pace since 2009.

“Policy makers will become more aggressive,” said Bhanu Baweja, a London-based strategist at UBS. “The currency strengthening is in contrast with the state of the economy. That argues for much weaker foreign-exchange rates.”

Bloomberg

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