WASHINGTON — Fears of a full-blown currency war flared Thursday as the dollar fell to an eight-month low against the euro and the U.S. stepped up pressure on China to let its currency rise.
The escalating tension threatened to dominate a three-day conference of the International Monetary Fund and the World Bank. Leaders from both groups warned Thursday that a currency war could destabilize global financial markets at a fragile moment.
The flare-up comes as investors are anticipating the U.S. Federal Reserve will pump billions more dollars into the U.S. economy. That is weakening the value of the dollar against the euro, which has been surging.
A falling dollar can affect U.S. consumers, investors and businesses in various ways. Travel to Europe becomes more expensive for Americans. Exports from U.S. businesses become more affordable for European buyers. U.S. Treasurys become less attractive to investors.
A different scenario has been playing out with China. An undervalued Chinese yuan has weakened U.S. exports while making Chinese goods attractive to U.S. consumers. The imbalance has weakened U.S. economic growth. And it threatens U.S. manufacturing jobs at a time when the American economy is struggling with 9.6 percent unemployment.
At the same time, China's economy is soaring.
World Bank President Robert Zoellick said Thursday that the tensions over currencies could undermine investor confidence at a time when the world needs the private sector to bolster growth.
"If ever there were a time that we should not turn our backs on international cooperation, it is now," Zoellick said at a news conference ahead of three days of high-level talks on global finance in Washington.