Timothy Geithner calls on G20 nations to avert global currency war

US treasury secretary tells G20 members to stop manipulating currencies and urges rebalancing of world economy

Timothy Geithner: letter sets out 'a possible way forward'. Photograph: Ron Edmonds/AP

US treasury secretary Timothy Geithner has told the G20 nations to stop manipulating their currencies to prevent "excessive volatility" and a global currency war. In a letter to the G20 finance ministers, he also urged them to cap current account surpluses or deficits to rebalance the world economy and said the International Monetary Fund should monitor countries' progress.

The finance ministers of the G20 nations today started a two-day meeting in South Korea.

The dollar fell on the comments, with one trader saying that Geithner appeared to take a more aggressive stance on the rebalancing of the global economy.

Jim Flaherty, Canada's finance minister, backed Geithner's proposals. "Secretary Geithner's letter is helpful. It sets out a possible way forward that has been discussed among participants here and previously," Flaherty said. "No one wants to be confrontational here. No one wants to walk away from here without an agreement on an action plan."

China, which has built up large trade surpluses, is under mounting pressure to revalue the yuan. It has been criticised by the US and Europe for pegging its currency at a low level, which means its exports are cheaper worldwide. The World Bank has warned that a full-scale currency war risked a return to the protectionism of the 1930s, amid fears that growing tension between Washington and Beijing will hold back the global economy's recovery from the worst slump in decades. Other countries, including Brazil, Japan, South Korea, Switzerland and Taiwan have also moved to weaken their currencies.

In his letter, Geithner said: "First, G20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognising that some exceptions may be required for countries that are structurally large exporters of raw materials.

"This means that G20 countries running persistent deficits should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels and by strengthening export performance. Conversely, G20 countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand."

He called on countries to refrain from manipulating currencies to achieve competitive advantage by either weakening their currency or preventing the appreciation of an undervalued currency – a clear dig at China. He also said the IMF should monitor progress on G20 countries' commitments and publish a semiannual report.