October 11, 2018 / 4:19 AM / in 10 days

UPDATE 1-IMF's Lagarde warns trade, currency wars could be detrimental for growth

* Urges countries to “de-escalate” trade frictions

* China yuan’s slide driven mostly by dollar strength

* Calls on China to keep moving toward flexible FX system (Adds quotes, detail, context on trade friction, yuan)

By Leika Kihara and David Lawder

NUSA DUA, Indonesia, Oct 11 (Reuters) - International Monetary Fund Managing Director Christine Lagarde on Thursday warned countries of the perils of a trade or a currency war, saying they could be detrimental to global growth and hurt “innocent bystanders.”

Lagarde urged countries to “de-escalate” trade frictions and fix global trading rules, rather than abandon them.

“We certainly hope we don’t move in either direction of a trade war or a currency war. It will be detrimental on both accounts for all participants, Lagarde told a news conference during the annual meetings of the IMF and World Bank in Indonesian resort island of Bali.

“And there would also be lots of innocent bystanders.”

China and the United States have slapped tit-for-tat tariffs over the past few months, rattling financial markets as investors worried the escalating trade war could knock global trade and investment.

On recent yuan declines, Lagarde said they were mainly driven by the strength of the dollar, noting that it has not depreciated as much against a basket of currencies.

“We’re seeing more and more countries, China included, let their currencies fluctuate,” Lagarde said.

The yuan currency has faced strong selling pressure this year, losing over 8 percent between March and August at the height of market worries, though it has since pared losses as authorities stepped up support.

A U.S. Treasury official on Monday repeated that the Trump administration was concerned about the yuan’s recent weakening as the department prepares a semi-annual report on currency manipulation due out next week.

US President Donald Trump has accused China of deliberately manipulating its currency to gain a trade advantage, claims Beijing consistently rejected.

“We have supported the move of China toward (currency) flexibility,” she said, adding that the IMF has encouraged Chinese authorities to “go down that path.”

Lagarde urged China to follow through on the IMF’s recommendation to continue moving toward a system that allows the yuan to move flexibly.

She declined to comment on the recent market rout, but said U.S. equities and overall stock prices “in general have been extremely high.” (Additional reporting by Yawen Chen Editing by Shri Navaratnam)

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