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Weak economy fueling fears a currency war may loom

The International Monetary Fund’s managing director, Dominique Strauss-Kahn, gestured during the opening news conference for the annual IMF and World Bank meetings yesterday. The International Monetary Fund’s managing director, Dominique Strauss-Kahn, gestured during the opening news conference for the annual IMF and World Bank meetings yesterday. (Haraz N. Ghanbari/Associated Press)
Associated Press / October 8, 2010

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WASHINGTON — Fears of a full-blown currency war flared yesterday as the dollar fell to an eight-month low against the euro and the United States stepped up pressure on China to let its currency rise.

The escalating tension threatens to dominate a three-day conference of the International Monetary Fund and the World Bank. Leaders from both groups warn that a currency war could destabilize global financial markets at a fragile moment.

The flare-up comes as investors are anticipating that the Federal Reserve will pump billions more dollars into the US economy. That is weakening the value of the dollar against the euro, which has been surging.

A falling dollar can hit US consumers, investors, and businesses in various ways. Travel to Europe becomes more expensive; US exports become more affordable in Europe. US Treasurys become less attractive to investors.

A different scenario has been playing out with China. Its undervalued yuan currency has weakened US exports, while making Chinese goods attractive to US consumers. The imbalance hurts US economic growth, threatening manufacturing jobs as the American economy struggles with 9.6 percent unemployment. At the same time, China’s economy is soaring.

The World Bank’s president, Robert Zoellick, said tensions over currencies could undermine investor confidence.

“If ever there were a time that we should not turn our backs on international cooperation, it is now,’’ he said at a news conference ahead of three days of talks on global finance in Washington.

Governments are feeling pressure to produce jobs by boosting exports. One way is to lower currency values. China is hardly alone: The United States is pressuring Beijing but flooding markets with US dollars.

Japan intervened in currency markets for the first time in years Sept. 15, selling yen and buying dollars to push the yen lower. Brazil and South Korea have also taken action to weaken their currencies and help exporters.