[ForexNews]

Over the weekend, the G20 finance ministers and central bank governors delivered a communiqué showing a clear determination to continue to support the global recovery. This should quell remaining fears of any early exits from the ultra-loose policy stance seen in most major economies. This stance is supported by a paper delivered by the IMF, calling on global financial leaders not to choke off emergency support for their economies too quickly.

There was no direct mention of exchange rates in the communiqué. However, the newly agreed 'Framework for Strong, Sustainable and Balanced Growth' could well lead to rising tensions over exchange rates during the newly introduced mutual assessment process of all G20 member countries' economic policies in 2010. This framework is aimed at moving from crisis response to working towards “stronger, more sustainable and balanced growth”. In other words, it aims to achieve internationally consistent policies. It is hard to discuss this issue without also addressing exchange rates.

The timetable is as follows: National and regional policy frameworks and projections will be set out by January 2010. The initial phase of the mutual assessment process will take place In April, supported by the IMF and World Bank. This will assess the collective consistency of national and regional policies. The choice of policy options will then be put forward to the G20 leaders at their next summit in June 2010. Then, more specific policy recommendations will be set out for discussion at the November 2010 G20 summit in South Korea. This effort at genuine international policy coordination will surely result in tensions over exchange rate policies, which could resurrect strong pressure for further appreciation of the Chinese yuan (CNY).

As he arrived for the meeting in Scotland, People's Bank of China (PBoC) Governor Zhou said that the pressure on China allow the CNY to strengthen is not that large. This contrasts with comments from European Central Bank (ECB) President Trichet earlier in the week that a stronger CNY would help to rebalance the world economy. At the very least, calls for flexibility are rising, even within China. Fan Gang, an academic member of the PBoC's Monetary Policy Committee, said on Friday that China needs a managed float for the CNY. Limited calls were made on the sidelines of the G20 meeting for a stronger CNY. One exception was a Brazilian finance ministry official, quoted as saying that China's fixed exchange rate is a problem.