Seoul: World leaders gathered for the Group of Twenty (G-20) summit neared an agreement that appears to paper over many of the differences that have roiled discussions and financial markets in recent days, but one that’s unlikely to end tension over currency and trade policies.

The agreement will likely reaffirm earlier language hashed out by finance ministers on letting markets determine foreign exchange rates, without yielding specific new commitments from China to let its currency rise. It will pledge efforts to close the gap between countries with big trade surpluses and those with big deficits, but will likely stop short of numeric targets pushed by the US.

President Barack Obama urged the G-20 nations to stand firm against protectionism and called for a joint commitment to growth, part of an effort by US officials to soften discord as the G-20 prepared for its meeting.

Even as the leaders meet, some emerging nations are erecting berms around their economies, as a torrent of capital pours in and threatens to derail their growth by sending currencies soaring and hobbling exporters. The Federal Reserve’s recent plan to stimulate the US economy by buying bonds has further frayed nerves, by threatening to undercut the dollar.

This week, Taiwan imposed limits on bond holdings by foreigners. In October, Brazil and Thailand raised taxes on foreign investment in local bonds. In June, South Korea restricted derivatives trading.

Central banks from Israel to South Africa are buying dollars to keep their currencies from rising. China raised reserve requirements at banks this week, a move to slow foreign investment.

Obama’s letter to other leaders came amid finger-pointing that threatened to overwhelm the summit. He reached Seoul on Wednesday night for meetings on Thursday, including with German chancellor Angela Merkel, whose government has led criticism of the US dollar policy, and Chinese President Hu Jintao, who has resisted the President’s push on China’s currency. US officials say the depth of the discord has been overstated in the days before the summit, and hope emotions will ease if leaders endorse what their ministers previously agreed to.

“We think everyone is going to have an interest in lowering the temperature and defusing some of the tension by agreeing on a multilateral process for helping to resolve these pressures" on the global financial system, said US treasury secretary Timothy Geithner.

A draft communiqué prepared on Wednesday illustrated the G-20 divisions. It said the nations would increasingly let markets determine currency rates, but officials remained undecided about how to discuss currency interventions. It said nations would “refrain from competitive devaluation", but in brackets was the alternative wording “competitive undervaluation", an apparent reference to China.

Officials indicated the G-20 leaders would fudge the key issue of how to reduce global trade imbalances. Geithner said the summit likely wouldn’t agree on targets for how large trade surpluses and trade deficits should be, a suggestion he had made earlier that drew opposition from Germany and others. Instead, the G-20 may leave it to the International Monetary Fund (IMF) to sort out, said Canadian finance minister Jim Flaherty. IMF would report to the G-20 finance ministers at their next meeting in February.

As originally conceived, at least by the US, this G-20 gathering was a chance to push China to allow its currency to rise more quickly. US officials want countries with large surpluses, such as China, to consume more domestically and export less, which would help the US save more domestically and export more. But Germany and China turned the tables, in effect accusing the Fed of driving down the value of the dollar, particularly through its plan to buy $600 billion (Rs26.6 trillion) of government bonds and other assets in coming months. The US officials replied that stimulating the US growth is in everyone’s interest and that a weaker dollar is a by-product of their efforts, not the objective. Although China led the criticism, it isn’t pushing to have the Seoul communiqué single out the Fed, a Chinese official said.

Officials in emerging markets say the capital inflows they are seeing mean they can’t wait for international accords. With economies in the US, Japan and Europe feeble and their interest rates low, faster-growing nations such as Brazil are attracting a frenzy of investment.

The capital inflows can create asset bubbles and overvalued currencies or stock markets, primed to plunge the moment investors move their money elsewhere. Overvalued currencies also mean exporters lose their edge because their goods are costlier abroad. Some emerging nations are embracing once-taboo policy prescriptions to restrict inflows, the latest example of the tensions generating by economic imbalances between rich and developing economies.

IMF, which once criticized capital controls, now gives its blessing to measures such as taxing foreign bond investments, and cites the success of such measures during the Asian financial crisis of the late 1990s. IMF and other keepers of the economic orthodoxy still emphasize the benefits of foreign direct investments, however.

wsj@livemint.com

Tom Murphy, Evan Ramstad and Kanga Kong also contributed to this story

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