A currency role for Seoul

The global currency war is turning fierce and ugly. The flames that started with pressure by the U.S. and the EU on China to appreciate its currency to fix trade imbalances were further fueled by Japan’s large-scale sale of yen to cut interest rates to zero and stem the yen’s rise.

The fire expanded on expectations that the U.S. Federal Reserve will stimulate the economy through quantitative easing. As major economies increase liquidity and cap rises in their currencies, capital is fleeing these markets and into emerging economies, which are appreciating their currencies. Brazil has doubled its capital transaction tax for foreign investors. India, Thailand and Korea are considering taking action to stem the rise of their currencies. China is keeping its currency stable despite international calls for appreciation.

The joint international effort to fight the global financial crisis two years ago is nowhere in sight. All are too busy saving their own necks. Dominique Strauss-Kahn, the International Monetary Fund managing director, warned that the use of currency to support economic growth will kill the global recovery. “There is clearly the idea circulating that currencies can be used as a policy weapon,” he said. The Institute of International Finance, ahead of the annual IMF and World Bank conference this week in Washington, urged joint action to stop the currency war, saying it represented a “disturbing trend towards unilateral moves on macroeconomic, trade and currency issues.”

But the G-7 finance ministers are unlikely to reach a consensus on the issue as it is doubtful that China will suddenly change its mind on currency policy.

A more intense debate will likely be put off until the G-20 Summit in Seoul in November. Coordinated efforts can mend the serious fissures in economic and currency policies before they wreak havoc on the global economy. Korea may worry that if the G-20 meeting - the first in Asia - turns into a heated debate between the U.S. and China, its agenda on establishing a global financial safety net will fall out of the spotlight. But nothing for the time being is more urgent than the currency issue that has moved beyond a bilateral conflict between Washington and Beijing. Emerging economies are raising their voices to protect their economies from harm because of excessive currency moves in advanced economies. As the chair of the G-20 Summit, Korea must display leadership in mediating currency policy to reinstate order and balance in the global economy. The government must also come up with ways to smooth currency volatility stemming from increased inflows of foreign capital.