Flaherty warns of currency war

Finance Minister Jim Flaherty warned Wednesday that a currency war over exchange rates could disrupt trade and derail the nascent economic recovery.

G20 representatives will thrash out the issue later this week at meetings in Washington, D.C., he said.

Flaherty is due to chair a meeting of G7 finance ministers there at the same time.

His comments came as Canada's dollar rose to a five-month high against the American dollar Wednesday. The greenback continued to slide against other major world currencies.

The loonie closed at 98.94 cents US, up 0.59 of a cent. Earlier it touched 99.38, its highest level since April 30.

The U.S. dollar, since its high in June, has lost 18 per cent against the euro.

"The move's been fairly violent in terms of the weakness of the U.S. dollar," Camilla Sutton, currency strategist at Scotia Capital, told CBC News. "It's certainly heating up in terms of the currency markets." 

'Everyone can't have a weak currency together.' — Camilla Sutton

The fall in the American currency came amid speculation that the U.S. and other central banks will increase the supply of money to stimulate growth and as emerging economies try to raise exports by weakening their currencies.

"There's a global desire to have a weak currency", said Sutton. "However, everyone can't have a weak currency together."

Crude oil, which is priced in U.S. dollars and is Canada's biggest export, traded near a five-month high.

The November contract in New York traded as high as $84.09 US a barrel before closing at $83.23, up 41 cents.

October bullion finished higher by $7.50 at $1,346.40 US an ounce.

Stock markets mostly traded in a tight range.

In Toronto, the S&P/TSX composite index ended up 3.7 points, or 0.3 per cent, to 12,501.7.

In New York, the Dow Jones industrial average rose 22.93 points, or 0.21 per cent, to 10,967.65. The Nasdaq composite index lost 19.17 points, or 0.8 per cent, to 2,380.66 while the S&P 500 index was off 0.78, or 0.07 per cent, at 1,159.97

Also Wednesday, U.S. Treasury Secretary Timothy Geithner called on China to move more quickly toward a floating currency.

In a speech in Washington, Geithner did not mention China specifically, but said when large economies keep their currency undervalued, it encourages other nations to do the same.

"The collective impact of this behaviour risks either causing inflation and asset bubbles in emerging economies or else depressing consumption growth," he said.

U.S. manufacturers contend that the Chinese yuan is undervalued by as much as 40 per cent, giving Chinese exports an unfair advantage.

The Bank of Japan, concerned about the effects of the surging yen on its exports, on Tuesday cut its benchmark interest rate target from 0.1 per cent and set up a $60-billion US fund to buy government bonds and other assets.

The yen hit a 15-year high in September, which threatens the growth prospects of a country heavily reliant on exports.

Brazil and South Korea have also moved recently to weaken their currencies.

The Philippines, Thailand, Malaysia and India have given signs they might take steps to reduce the volatility of theirs, as well.