G20 chiefs pledge to end global trade war

Global policymakers have struck an agreement aimed at easing an escalating currency war before it threatens to derail the world economic recovery.

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Global policymakers have struck an agreement aimed at easing an escalating currency war before it threatens to derail the world economic recovery.

But economists say the pledge by the Group of 20 (G20) leading and emerging economies is unlikely to prevent further weakening of the US dollar, to which the dirham and four other Gulf currencies are pegged.

A weaker dollar could lead to a rising oil price and increased inflationary pressures in the region.

G20 finance chiefs yesterday agreed in Gyeongju, South Korea to refrain from deliberately weakening their currencies to promote exports and to allow markets to decide foreign exchange values.

"It was to everyone's interest that they found some sort of gentlemen's agreement whereby although they may not protect themselves, they would protect the world economy," said John Sfakianakis, the chief economist at Banque Saudi Fransi.

It is the first time the G20 members have agreed on a common approach to exchange rate policies and it underlines the seriousness with which leading economies view the currency tensions.

The commitment is aimed at ending disputes over exchange rate positions that have been simmering for months.

The US and China have been the chief protagonists in the disagreement, with both accused of lowering their currencies to underpin domestic economic growth through cheaper exports.

Other countries in South America and Asia have blamed such actions for their own currency rises, harming the competitiveness of their exports. Yesterday's agreement suggests a breakthrough in the turmoil, ahead of next month's Seoul summit of G20 leaders.

The G20 agreed to "move towards more market-determined exchange rates systems that reflect underlying economic fundamentals and refrain from competitive devaluations of currencies".

It said the global economic recovery was "fragile and uneven".

Speaking after the meeting, the US Treasury secretary Timothy Geithner said his country had a "special responsibility" to support a strong dollar.

Nonetheless, economists still expect further depreciation of the greenback in the coming months due to persisting weaknesses in the US economy. The dollar on Wednesday fell to a 15-year low against the Japanese yen.

"If governments are to allow market forces to determine currency values we should see emerging market currencies strengthen and the US dollar and other currencies in developed economies weaken," said Tudor Allin-Khan, the chief economist at HC Brokerage in Dubai.

A lower dollar can lead to growing inflationary pressure among GCC members pegged to the currency as they have to pay more for imported goods and services from Europe and Asia.

But the lower dollar tends to push up oil prices as the commodity becomes more attractive to investors seeking higher returns. Oil prices edged higher on Friday, with crude rising to $82 a barrel.