By Vicki Schmelzer

NEW YORK (MNI) – At upcoming G-20 meetings in October and November,
China may not be the only country taken to the woodshed, analysts
predict.

They believe the United States and other countries whose central
banks have engineered a low-yield interest rate environment may also be
targeted.

Finance ministers and central bankers will meet October 21-23 in
Gyeongju, South Korea, to be followed by the G-20 Summit November 11-12
in Seoul, South Korea.

Ahead of these meeting, the International Monetary Fund/World Bank
fall meetings will take place October 8-10 in Washington.

There will be no shortage of soundbites about QE2 and currencies,
the analysts said.

In comments Monday to the UK Telegraph, Brazil’s Finance Minister
Guido Mantega, spoke of an “international currency war” and pointed to
the U.S., Europe and Japan after mentioning that “advance countries are
seeking to devalue their currencies.”

At the upcoming G20 meetings, expect a “War on QE2,” said Steve
Englander, global head of G-10 strategy at CitiFX.

This is because, “countries are upset by what (the prospects of)
QE2 is doing to their asset markets and currencies,” he said.

Indeed, concern about QE2 is likely to shift the focus away from
China’s failure to let the yuan appreciate at a faster pace, analysts
said, adding “China is an old story.”

Emerging market central bankers have been working diligently in
recent sessions to prevent their countries’ currencies from appreciating
at a too fast pace versus the dollar and other currencies.

In the case of EM gains versus the dollar, the reason for currency
strength has been blamed on the prospects of the Federal Reserve
adopting new quantitative easing measures perhaps as early as November.

Similarly EM gains versus other currencies, such as the euro, cable
and yen are seen as the expected consequence of the low interest rate
environment seen in these countries.

The dollar has been on a downward trajectory ever since Federal
Reserve Chairman Ben Bernanke’s speech at the Jackson Hole conference in
August.

Bernanke’s words “Should further action prove necessary, policy
options are available to provide additional stimulus” were taken to mean
that a new round of quantitative easing was possible, if not probable,
with market players moving their Fed rate hike expectations from Q1 2011
to Q3 2011.

The spotty U.S. data seen since then has some economists moving Fed
rate hike expectations even further, into Q4 2011 or even Q1 2012.

This sentiment shift has pushed U.S. Treasury yields lower, which
in turn has weighed heavily on the dollar.

“All this dollar weakness is leading to the charge (from Brazil)
that major countries are engaged in a currency war where they seek FX
weakness,” said Steve Barrow, senior currency strategist at Standard
Bank in London.

This thinking might seem extreme, but perhaps less so when seen
within the context of debate about how the Federal Reserve might embark
on QE2, he said.

“If the Fed does more quantitative easing (QE2) how will it do it?
By ‘drip feeding’ a few hundred billion at time, or go for the ‘shock
and awe’ tactic of announcing a trillion dollar Treasury buying program
or more?” Barrow asked.

U.S. policymakers may think that QE failed in Japan because the
country never was able to weaken its currency, because authorities chose
the “drip feed” method.

“If this is what they (secretly) feel, then it certainly could be
the case that Brazilian concerns are not misplaced,” Barrow said.

Expectations are low, however, that anything meaningful will come
out of the upcoming G20 meetings.

Another Plaza Accord “is highly unlikely,” said Mansoor Mohi-uddin,
head of foreign exchange strategy at UBS.

He offered five reasons for this view, stating first, that “the US,
Japan, China and Europe won’t agree to coordinate exchange rate policies
as the major economies did in 1985 to weaken the dollar.”

Second, unilateral intervention is likely to be more frequent, with
Japan’s recent yen sales only the start of such efforts.

“Third, currency markets will increasingly differentiate between
central banks considering quantitative easing and those still willing to
tighten monetary policy, Mohi-uddin said.

Fourth, additional emerging market country governments may opt to
implement capital controls to stem currency strength, he said.

“Last, protectionist fears will rise. The prospect of currency wars
turning into trade wars will affect the outlook for risk assets,”
Mohi-uddin warned.

** Market News International New York Newsroom: 212 669-6430 **

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