G7 fires warning shot over currencies, markets confused

Tue Feb 12, 2013 3:58pm EST
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By Mike Peacock and Anna Yukhananov

LONDON/WASHINGTON (Reuters) - The Group of Seven rich nations sought on Tuesday to cool growing tension over exchange rates sparked by weakness in the Japanese yen, but currency markets found the effort lacking in clarity, triggering a second straight day of volatility.

The G7 declared that fiscal and monetary policies would not be directed at devaluing currencies, a statement meant to soothe nerves that Tokyo was aiming to guide the yen lower with its aggressive expansion of monetary policy.

Japan said the statement gave it a green light to continue efforts to reflate its economy but a G7 official said it was aimed squarely at Tokyo, prompting the yen to surge.

"Rather than calm the markets, the poorly communicated statement has significantly raised volatility," said Richard Gilhooly, fixed-income strategist at TD Securities in New York.

U.S. and European officials have been concerned about comments from Japanese officials that suggested Tokyo was targeting a specific level for the yen, which would run counter to the G7's official stance.

A day earlier, a senior U.S. official said competitive devaluations should be avoided, but that Washington supported Tokyo's efforts to reinvigorate growth and end deflation. The remark sent the yen sharply lower.

The G7 statement helped the yen solidify those losses, until a G7 official said markets had gotten the message wrong.

"The G7 statement signaled concern about excess moves in the yen," the official said. "The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend."   Continued...

People walk past a sign showing currency exchange rates in the central business district of Singapore January 18, 2013. REUTERS/Edgar Su