G-20 Members to Seek Appreciation of Asian Currencies, UBS Says

By Lilian Karunungan

Nov. 6 (Bloomberg) -- The Group of 20 finance chiefs will likely push for Asian nations to allow their currencies to appreciate when they meet in Scotland this weekend, according to UBS AG, the world’s second-largest foreign-exchange trader.

G-20 finance ministers and central bankers, including U.S. Treasury Secretary Timothy Geithner and European Central Bank President Jean-Claude Trichet, start two days of talks today in St. Andrews, Scotland. While exchange rates won’t be on the agenda, “many nations will seek to bring it up,” Geoffrey Yu, foreign-exchange strategist in London at UBS, wrote in a research report to clients today

China, the world’s third largest economy, has prevented the yuan from appreciating since July 2008, after it strengthened 21 percent against the dollar in the previous three years. Currency reserves have climbed about 20 percent in China, South Korea and Taiwan in the past year, a sign of dollar purchases designed to stop stronger exchange-rates from hurting exports.

“The Eurozone will likely press hard on the topic, and Asia will once again be on the receiving end of complaints due to inflexibility in many of the region’s currencies,” Yu wrote. “According to the U.S. Treasury, the U.S. is also seeking to use the G-20 to push for a plan for global rebalancing.”

The G-20 finance ministers’ agenda involves measuring the effects of member nations’ economic policies and proposing changes for their leaders, who meet in June. China and other Asian nations have accumulated dollars from widening trade surpluses, buying U.S. Treasury debt and depressing global yields. Lower borrowing costs helped stoke the U.S. housing and credit booms that turned to bust in 2007.

Boom and Bust

“If the G-20 succeeds in establishing a framework for global imbalance adjustments, investors can begin to look forward to gradual convergence in exchange rates towards fair value,” Yu wrote. “However, with growth still at the top of the countries’ individual agendas, realization of these goals may be many summits away.”

The Brazilian real has gained 36 percent against the dollar this year, the South African rand 23 percent, the Canadian dollar 14 percent and the euro 6 percent. The yuan is little changed over that period and the South Korean won gained 7.5 percent.

Brazil will propose the G-20 act to avoid overvaluation of the Brazilian, Australian, New Zealand and South African currencies against the U.S. dollar and the Chinese yuan, Folha de Sao Paulo reported yesterday, citing Finance Minister Guido Mantega. Canada is also concerned about the rising value of its currency, Yu at UBS wrote.

The World Bank said this week “exchange-rate flexibility” will be critical to prevent asset bubbles in East Asian economies. Developing East Asia, which excludes Japan, Hong Kong, Taiwan, South Korea, Singapore and the Indian subcontinent, will expand 6.7 percent this year, more than an April estimate of 5.3 percent, the Washington-based bank said a Nov. 4 report. Growth may accelerate to 7.8 percent next year, it said.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net.