G7 pledge against currency war lifts markets, euro
The G-7 nations, which include the U.S., Japan and Germany, said their economic policies should be “oriented towards meeting domestic objectives and not towards setting specific exchange rates.”
That was meant to ease concerns that major economies were retooling their monetary policies to weaken their national currencies to help domestic exporters.
Such worries began after Japan in December announced a new ultra-loose monetary policy that caused a sharp drop in the yen against other major currencies. With all major economies struggling to recover from the financial crisis, that raised the specter of a global race among governments to loosen monetary policies and weaken national currencies.
A so-called “currency war” would damage the global economy, whose recovery from the financial crisis is still fragile, by hurting trade.
Last week, French President Francois Hollande went as far as to say that the 17-country eurozone needs to manage its currency’s exchange rate.
After the statement’s release, the euro made up early losses to trade 0.4 percent higher on the day at $1.3453.
Germany’s DAX stock index rose 0.2 percent to 7,650.77 while France’s CAC 40 gained 0.5 percent to 3,667.38. Britain’s FTSE 100 was up 0.4 percent at 6,300.12.
Wall Street was headed for small gains — the Dow Jones industrial futures were up almost 0.1 percent to 13,928 while the broader S&P 500 futures were up marginally at 1,513.40.
Despite the positive market impact, analysts warned that the G-7 statement changed little in concrete terms, since any country could claim that its loose monetary policy was used to help the domestic economy, not set the interest rate. There is little to stop the Japanese central bank, for example, from continuing to pursue its ultra-loose monetary policies.
“One might well argue that this is a case of not being able to see the wood for the trees,” said Marc Ostwald, strategist at Monument Securities in London.
That skepticism was apparent in the performance of the yen, which remained stable after the G-7 statement. The dollar was down 0.1 percent against the yen at 94.19 yen.
The Japanese currency has dropped almost 8 percent against the dollar this year as Japan’s Prime Minister Shinzo Abe called for the central bank to ease monetary policy more aggressively.
Central bank governor Masaaki Shirakawa, who has appeared at odds with Abe’s views on monetary policy, is resigning next month, giving the government an opportunity to find a successor more sympathetic to its aims.
Asian Development Bank President Haruhiko Kuroda voiced support Monday for Abe’s economic policies including the introduction of a 2 percent inflation target but kept mum about speculation he may become the next BOJ governor. In an interview with media organizations including Kyodo News, Kuroda said the BOJ’s introduction of the target, proposed by Abe, was “epoch-making” and should be achieved “in about two years.”
Tokyo’s Nikkei 225, which closed before the G-7 statement was released, rallied 1.9 percent on Tuesday on the continued weakness of the yen.
The Bank of Japan holds a two-day policy meeting starting Wednesday but analysts said no new initiatives were expected in light of the impending leadership change.
Markets, meanwhile, were unfazed by a nuclear test conducted by North Korea on Tuesday. Pyongyang said it successfully detonated a miniaturized nuclear device at a northeastern test site.
South Korea’s Kospi fell 0.3 percent to 1,945.79 while benchmarks in Indonesia, Thailand and India rose. In Australia, the benchmark S&P/ASX 200 finished nearly unchanged at 4,959.
Markets in mainland China, Hong Kong, Singapore, Malaysia and Taiwan were closed for Lunar New Year holidays.
Benchmark oil for March delivery was down 24 cents to $96.79 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.31 to finish at $97.03 a barrel in New York on Monday as the euro strengthened against the dollar.