The G20 group of richest nations must act to avoid a currency war and halt a damaging drift toward fragmented regulation, the world's leading banks said Monday.
The Institute of International Finance, representing more than 470 financial firms, warned of the consequences of "possible discord on exchange rates" as countries rely on monetary policy easing to get their economies growing again.
"We believe major central banks should focus on enhancing their cooperation, especially of their communication strategies, to guide market expectations and thus help avoid a disorderly interest rate adjustment process and undue exchange rate volatility," the IIF wrote in a letter to Russian Finance Minister Anton Siluanov, who is chairing the G20 meeting later this week.
Currency markets have witnessed some hefty gyrations in recent months due to widening gaps between the policies of the world's major central banks as they seek to revive growth and, in some cases, consider how to withdraw emergency financial support that has kept banks and economies afloat during the post-financial crisis years.
Most marked has been the rapid devaluation of the yen against a range of currencies, and the strengthening of the euro against the dollar.
The yen has fallen on expectations of much greater monetary stimulus following the election of Prime Minister Shenzo Abe in December, who has pledged to end years of deflation and stagnation in the world's third-largest economy.
Indeed, the Bank of Japan has already doubled its inflation target and announced open-ended purchases of government bonds from next year, contributing to a 20% slide in the value of the yen against the dollar since the beginning of October. So far this year, the yen has also fallen 9% against the euro.
Some European politicians have expressed concern about the pace of the moves, and Japanese officials have started to moderate their rhetoric.
European Central Bank president Mario Draghi said last week he saw no sign of deliberate competitive devaluations but the bank was watching closely to see if exchange rates were beginning to affect the outlook for inflation in the eurozone.
The strength of the euro reflects a return of investor confidence as risks of a eurozone break-up fade, but also the fact that the ECB balance sheet is shrinking as banks repay emergency loans, while those of the Bank of Japan and the Federal Reserve continue to expand.
"The challenge clearly is for both mature and emerging market economies to develop appropriate strategies... to deal effectively with the eventual reversal of low-interest rate policies and quantitative easing," the IIF said.
Analysts say any G20 statement later this week on currencies will be mild, given the need to achieve consensus.
"There is likely to be some broad language that Japan can agree to -- they are already shifting their language to Fed-like comments that depreciation is neither a target nor a tool, but a consequence of their domestic policies," Steve Englander, Citi's global head of G10 foreign exchange strategy, wrote in a note.
The G20 represents the 19 leading developed and emerging economies, plus the European Union, accounting for some 90% of global output and 80% of international trade.
The IIF echoed concerns on financial regulation expressed by leading executives at last month's World Economic Forum in Davos, Switzerland. The U.S, Germany, France and the U.K. all have plans to enact slightly different versions of new rules designed to separate riskier investment banking activities from retail and commercial banking.
And some attempts at international regulation are also creating confusion and complexity, with proposed European rules on solvency preventing insurers investing in banks.