G-20 says volatile currencies pose risk after dollar surges

Global finance chiefs identified volatile currencies as a threat to an improving world economy, signalling for the first time that they may be concerned by a surging US dollar.

“There are important challenges including volatility in exchange rates,” central bankers and finance ministers from the Group of 20 said in a statement after talks in Washington on Friday.

Countries can use capital controls “as appropriate” to deal with large and volatile flows in cross-border funds, according to the statement.

The warning from the key economies comes after the dollar rose 17 percent over the past year, according to the Bloomberg Dollar Spot Index.

Behind the rise are investor bets that the Federal Reserve will soon raise its main interest rate for the first time since 2006 as the US economy outpaces foreign counterparts.

The worry is the more the dollar gains, the more markets will be unsettled after years of easy money. At particular risk are those emerging economies which tie their currencies to the greenback, produce commodities, boast large current-account deficits or have run up debts denominated in the dollar.

While not on the official G-20 agenda, concerns lingered that a cash crunch could force Greece out of the euro as its leaders and creditors try to find the common ground needed to free up another round of bailout funds.

When threats arise from “large and volatile capital flows, the necessary macroeconomic adjustment could be supported by macro-prudential measures and, as appropriate, capital flow management measures,” the G-20 said.

The reference to capital controls will probably “raise eyebrows,” because of the conventional economic wisdom that countries should open up markets, said Torsten Slok, chief international economist at Deutsche Bank AG in New York.

“The traditional textbook will tell you that if you’re an emerging market, depreciation in your currency will be good for exports,” he said. “This shows they recognize what a challenge it can be to manage your currency when things are moving this fast.”

Complicating the outlook are varying speeds of recovery.

As the Fed looks to raise interest rates, at least 30 other central banks have eased monetary policy this year, led by the European Central Bank’s embrace of quantitative easing. That split is also aggravating shifts in financial markets as evidenced by declines in the yen and euro.