IMF backs off on currency monitoring rule

By Lesley Wroughton

WASHINGTON (Reuters) - In a major about-face, the International Monetary Fund said on Tuesday it would revise its rules on how it monitors foreign exchange policies of member countries, acknowledging that its efforts to step up oversight of currencies had backfired.

In a staff report, the IMF said it would no longer use the specific phrase "fundamental misalignment" that it had decided to use in 2007 to pressure countries to alter foreign exchange policies.

"The attempt to apply exchange rate-related 'labels'-- for instance, the use of specific terminology such as fundamental misalignment -- has proved an impediment to effective implementing of the decision," the IMF said.

The move is a victory for China, which has opposed the 2007 changes and pushed back at the Fund's prodding over its exchange rate, seeing it as part of a U.S. ploy to enlist the Fund in its campaign for a stronger yuan.

Since then, Beijing has delayed the completion of the IMF's annual assessment of the Chinese economy.

While China is not the only country to object to the 2007 changes, it is by far the most important.

The staff report also said that because of a shift in policy, it would no longer hold ad-hoc consultations with countries whose currencies are misaligned and causing problems for other nations.

It said its attempts to determine whether foreign exchange policies were "fundamentally misaligned" undercut the candor of discussions with countries and undermined the Fund's monitoring role and damaged its credibility.

(Reporting by Lesley Wroughton; Editing by Dan Grebler)