By Anna Willard, BridgeNews
Washington--Jan. 13--International Monetary Fund managing director, at the end of his visit to Asia, said he welcomed the recent reversal in the exchange rates of the major currencies. He said the intervention the European Central Bank in the second half of last year showed the "institution's maturity," but intervention cannot change market trends.
* * * "The good news is that a reversal has been getting underway, thanks mainly to better economic performance in Europe and slowing growth in the US," Koehler said in a speech at the meeting of Asia-Europe finance ministers in Kobe. A copy of the speech was released here.
"It was right for the ECB to make clear that a heavily undervalued euro was unacceptable. Its interventions have demonstrated the ECB's institutional maturity. But we also know that intervention cannot change market trends. It must be very selective and well coordinated," he added.
He also said that the IMF's largest member countries have a responsibility to make the most of possibilities for effective policy coordination to reduce exchange rate volatility and risk of misalignments.
Koehler also talked about different types of exchange rate regimes. He said that while no single exchange rate regime is appropriate for all members in all circumstances, a flexible exchange rate regime is often
He said that hard pegs are appropriate in limited circumstances, mainly for countries with a history of high inflation. Argentina, Bulgaria, Estonia and Lithuania each escaped from a cycle of chronically high inflation through strategies based on the use of currency boards and Hong Kong has maintained a currency board for nearly two decades.
But living safely under a peg obliges a country to have a particularly sound financial and corporate sector and strong support from macroeconomic policies as well as considerable wage and price flexibility.
On the subject of the slowing global economy, Koehler reiterated points made earlier during his tour that "it would be an exaggeration to embark on doomsday scenarios now."
He said the recent reduction in key US interest rates was a timely measure to help ensure a soft landing in the US and strengthen global growth prospects, adding that the US has further room for maneuver on monetary and fiscal policy.
In Europe, the fundamentals have improved and tax reforms are taking effect at the right time, he said. "But both Europe and Japan can and should do more to promote sustained growth and thereby strengthen investor confidence in the global economy."
He said the key for this lies in a deepening and acceleration of structural reforms--with special attention to corporate and financial sector restructuring in Japan and to labor market and pension reform in Europe. Koehler also called for another round of World Trade Organization negotiations.
Koehler visited Singapore, Hong Kong and Japan on his tour.
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