By NICHOLAS HASTINGS
A Dow Jones Column
LONDON -- Once again, the International Monetary Fund has disappointed on the currency front.
There were plans a few years ago for the organization to become the currency policeman of the world, helping to prevent foreign-exchange manipulation and reduce trade imbalances.
This didn’t happen.
Instead, as the world struggled to recover from the recent financial crisis, many countries were plunged into a “currency war,” pursuing competitive devaluations to achieve export growth.
While China was seen as the main currency manipulator not so long ago, with its tight grip on any appreciation of the Chinese yuan, the U.S. is now being accused of a similar sin–keeping the dollar low by resorting to further quantitative easing.
With Fed officials acknowledging this week that they are ready to introduce more QE if needed and that exiting this ultra-easy policy will take years, accusations of currency manipulation and the risk of further currency wars could last some time.
From the IMF, however, nothing.
And now the organization has missed a second chance to show that it could be a leader on the foreign-exchange front.
Given the declining importance of the dollar both in terms of world trade and as an international reserve currency, the IMF was widely expected to reflect these changes in its five-yearly restructuring of its own reserve asset and unit of account, the special drawing right.
At the moment, the SDR is a basket of four major currencies, dominated by the dollar with a 44% weighting but also including the euro, the yen and the pound.
There had been speculation that the IMF would acknowledge not only the rising importance of China, by giving some recognition to the yuan, but also the increased use of commodity currencies, such as the Australian and Canadian dollars, as well as the growing importance of some larger emerging market currencies.
In the event, the IMF did little more than tinker at the edges.
The dollar’s contribution to the basket was cut marginally to 41.9% while the euro’s was raised to 37.4% from 34%. The pound’s contribution was largely unchanged while the yen’s was reduced slightly.
This was hardly the adjustment to the SDR that would make the fund’s lending unit more up to date, making it more attractive as the lending instrument some countries would like it to be.
IMF chief Dominique Strauss-Kahn has defended the fund’s decision not to include the yuan because the Chinese currency isn’t freely traded.
Nonetheless, there was no hint that the IMF was even looking at including the other rising currencies of the world, such as the Mexican peso, the Indian rupee or even the South African rand, for inclusion in what will probably end up being a currency instrument with as limited a future as it has had a past.
(Nick Hastings has covered the foreign exchange markets and industry for more than 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: firstname.lastname@example.org.)