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The use of the exchange rate by governments to solve domestic problems risks a currency war, International Monetary Fund Managing Director Dominique Strauss-Kahn has warned.
In an interview published on the Financial Times website dated Tuesday, Strauss-Kahn said there is clearly the idea beginning to circulate that currencies can be used as a policy weapon.
"Translated into action, such an idea would represent a very serious risk to the global recovery . . . Any such approach would have a negative and very damaging longer-run impact," he was quoted as saying.
Japan intervened in the currency market on September 15 for the first time since early 2004 to stem the yen's surge against the dollar. Last week, Brazilian finance minister Guido Mantega told a meeting that his nation is in the midst of an international currency war.
"We have seen reports that some emerging countries whose economies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side," IMF chief said. "I don't think that is a good solution."
On September 28, Strauss-Kahn had told reporters that there is no big risk of a global currency war. A low key intervention will not have any effect, he had said. If it is done strongly, it will cause retaliation, Strauss-Kahn then warned.
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