WASHINGTON -(Dow Jones)- Exchange-rate discussions among financial ministers at the Group of 20 nations conference later this week will largely be in the context of emerging-market concerns about volatile capital flows, commodity-price inflation and rebalancing the global economy, a senior U.S. Treasury official said Tuesday.
China's policy of keeping a tight lid on the yuan, despite some moves toward liberalizing its currency, has become increasingly irksome to developing nations such as Brazil. Low interest rates in the U.S. and Europe are fueling massive investment into emerging nations that promise higher cash yields, but the under-valued yuan is forcing other developing nations to bear the brunt of the pain given that their exchange rates are largely already floating at market rates.
Many emerging-market economies are near overheating, and food and other commodity-price inflation is adding to their economic problems.
The senior Treasury official said Washington supports a plan by French President Nicholas Sarkozy, as chairman of the G-20, to develop a framework to manage volatile capital flows. The official said there may be some circumstances where so-called "macroprudential measures," which are designed to manage investment flows in and out of countries and are often called capital controls, could be used.
Traditionally, the U.S. has objected to such controls, but given the circumstances of some emerging countries, Washington appears to be taking a slightly more practical approach, using the discussion to continue to apply pressure on Beijing to let its currency appreciate.
In Brazil recently, Treasury Secretary Timothy Geithner called some of the measures used "pragmatic." Treasury officials point to the fact that Brazil's strong currency and already relatively high interest rates leave the country with little room to maneuver. China, meanwhile, could help to take some of the currency pressure off nations such as Brazil by raising the value of its currency. The yuan hasn't appreciated against many emerging-market currencies at the same pace as it has with the dollar.
Aside from allowing currencies to float at market-determined levels, the senior Treasury official said the U.S. hasn't yet determined what policy mix should be included in any framework. But, the official said, it should include an assessment of the spill-over effects that capital controls and exchange-rate policy have on major trading partners.