Spotlight on dollar as G20 meeting eyes FX stance overhaul

A draft communique prepared for next week’s gathering of G20 finance chiefs has dropped the group’s standard pledges on the need for flexible yet stable exchange rates and orderly markets, suggesting it could prove a landmark event for currency markets.The world’s most powerful finance ministers and central bankers convene in the German spa town of Baden-Baden on March 17-18, their first meeting since Donald Trump’s election victory in November and his reaffirmation of an avowedly protectionist, ‘America First’ stance on international trade.Solid US economic activity and rising inflation are pushing interest rates and the dollar higher.But the White House would clearly prefer a weaker currency to help US exports, manufacturing and competitiveness on the global stage.Figures on Tuesday showed the US trade deficit in January was $48.5bn, the widest in nearly five years.The draft communique has removed references to “excess volatility” and “disorderly” FX moves from last year’s statement, as well as a pledge to refrain from “competitive devaluations”.It has also reintroduced - for the first time in more than 10 years - a reference to “excessive global imbalances”, an apparent swipe at hefty trade surpluses in Germany and China.Taken together, these changes could be seen as another indication that Washington - without taking direct action or explicitly saying so - is resisting a strong dollar, which it blames for its stubborn trade deficit and manufacturing decline.The draft communique remains subject to change.And there is unlikely to be any appetite for currency wars, so the pledge to resist “excess volatility and disorderly movements” and refrain from “competitive devaluations” could still get reinserted.Nevertheless, if the final document bears any resemblance to its current guise, it will be a clear sign that the new White House administration is flexing its muscles on currencies and trade.“The wording of G7 and G20 statements has been used to justify specific actions or to send specific warnings in the past. If the wording sets the parameters for currency policy, it is therefore significant when it changes,” said Simon Derrick, head of global rates strategy at Bank of New York Mellon.Derrick pointed to the G7 wording on exchange rate ‘flexibility’ in Dubai, 2003, and ‘global current account imbalances’ in Boca Raton, 2004.Whatever was said at the time about what they meant, the fact is that Japan stopped intervening in FX markets to weaken the yen in 2004, he said.G20 members are unlikely to want their own currencies to appreciate much, if at all.But the reintroduction of the phrase on “global imbalances”, at a time when trade is firmly back on the international political agenda, “is clearly intended to send a strong message”, Derrick added.One G20 government official said the group was still debating exactly what signal it wanted to send on FX: “Whatever it is, we want to make sure it’s not misunderstood by markets.”Since Trump’s election victory the White House has accused Japan, China and Germany - three of America’s five biggest trading partners - of deliberately engineering undervalued exchange rates for competitive advantage, drawing frosty responses and stirring currency market volatility.