Dollar struggles as world seeks to avoid 'currency war'

LONDON: The dollar traded near an eight-month low against the euro on Friday and stock markets slid ahead of key US data and as major powers gathered in Washington to avert a damaging global " currency war."

With recovery painfully slow, recent weeks have seen nations from Japan to Colombia intervene to stop their currencies from rising to levels that would make exports prohibitively expensive, sparking talk of a currency war among key trading nations.

"It is a very real threat, and it will be in focus this weekend at the IMF/World Bank series of meetings in Washington," said GFT analyst David Morrison.

In London trade, the euro eased to 1.3914 dollars, one day after it had rocketed to 1.4029 dollars -- the highest level since late January.

Against the Japanese currency, the dollar stood at 82.34 yen, after tumbling on Thursday to a 15-year low at 82.11.

European stock markets also declined, with investors on tenterhooks ahead of crucial US payrolls figures due at 1230 GMT.

Later on Friday, the world's top economic powers will gather in Washington and address fears of potentially damaging currency competition amid bleak hopes for a deal between China, the United States and other top nations.

Finance ministers and central bankers from 187 countries will convene for an annual meeting of the International Monetary Fund confronted by warnings that beggar-thy-neighbor policies could wreck the global recovery.

"Given the recent environment of rhetoric about 'currency wars', unilateral intervention in foreign exchange markets and the introduction of policies to limit capital flow, there has been a lot of attention focused on what can be expected from this weekend's meetings," said Barclays Capital analyst Raghav Subbarao.

The dollar fell sharply this week after Japan adopted further economic stimulus measures, stoking speculation the US Federal Reserve would follow suit with a second round of what is known as quantitative easing -- notably the pruchase of bonds and other assets.

Such a move would likely dilute the value of the US unit.

"It was the Bank of Japan which effectively poked the hornets' nest with its unilateral intervention to stem the rise of the yen," added Morrison.

"This led to a general outcry from both China and the United States, and saw further interventions from Brazil, Taiwan and South Korea as these countries vied to keep their currencies competitive and their export markets buoyant."

The summit is set to be dominated by a long running and increasingly bitter dispute between the United States and China -- whose weak yuan policies are accused of slowing the global recovery and hurting American jobs.

Ahead of the Washington gathering, China's yuan on Friday hit its highest level since Beijing vowed to loosen its grip on the unit in June.

The People's Bank of China set the yuan central parity rate -- the middle of the currency's allowed trading band -- at 6.6830 to the dollar, the strongest since policymakers promised limited exchange rate reform.

The yuan strengthened during trading to close at 6.6706 to the dollar, Dow Jones Newswires reported, taking gains since the summer pledge to 2.3 percent.

China has a history of allowing the yuan to strengthen slightly ahead of events at which it expects to come under heightened pressure over the value of the currency, which US and European lawmakers say is grossly undervalued.

Germany argued Friday that the current levels of the yuan and dollar do not reflect "their real value," according to a spokesman for German Chancellor Angela Merkel.

Rabobank analyst Jane Foley said the United States was correct to call for China to allow the yuan to appreciate.

"Theoretically, US authorities are correct to call for a recalibration of the yuan, insofar as it would help rebalance China's big surpluses -- but the US needs to be careful about pointing the finger too much," Foley told AFP.

"The term 'currency war' was coined by the Brazilians who have been swimming against the tide of foreign inflows seeking higher returns.

"These inflows are clearly making the management of monetary policy difficult for the Brazilian, and the South Korean and Thai authorities. In fact, they could spark asset price bubbles throughout the emerging world.

"The Federal Reserve, which has a policy of proving ample cheap money through quantitative easing, must take some of the responsibility for this.

"Amongst countries with fully convertible currencies, the United States, via the Fed, are currently behaving as the biggest player in the currency war," she added.

Later Friday, dealers will digest US non-farm payrolls figures for September, which could increase pressure for more Fed stimulus measures if they disappoint the market.