Traders are losing confidence in the Group of 20 finance officials’ pledge to avoid foreign-exchange manipulation less than a week after the leaders vowed to stop devaluing currencies in order to prop up their economies.

Volatility among Group of Seven currencies rose to about the highest level in four months since the G20 meeting ended on Oct. 23, according to the JPMorgan G7 Volatility Index.

Euro-dollar fluctuations jumped 30 percent since Sept. 20, a day before Federal Reserve policymakers said they were prepared to buy bonds and pump more money into the financial system, data compiled by Bloomberg show.

While G20 nations committed to refrain from “competitive devaluation,” officials from South Korea and South Africa said last week that they may consider currency controls.

The reliance on intervention underscores the challenges finance officials face to keep their economies on track after injecting more than $2 trillion to spark growth following the worst financial crisis since the Great Depression.

“Volatility is the price of uncertainty,” said Richard Benson, an executive director in London at Millennium Asset Management. “Volatility’s current elevated level is a function of the currency war issue.”

The Fed is likely to unveil its second round of so-called quantitative easing when policymakers meet Nov. 2 and 3. The European Central Bank, Bank of England, Bank of Japan and Reserve Bank of Australia also have sessions this week. U.S. midterm elections Nov. 2 may give Republicans control of the House of Representatives in a blow to U.S. President Barack Obama, according to a Bloomberg National Poll from Oct. 24-26.

“This week is huge for event risk,” said Benson.

JPMorgan’s volatility index climbed as much as 1.71 percentage points from the day before the Fed’s last meeting on Sept. 21 to 13.06 percent on Oct. 7, the highest level since July. The firm’s emerging market index jumped about 1.95 points to 12.55 before finishing at 12.22 percent.

Investors favor smaller swings for so-called carry trades, where they sell currencies of nations with low interest rates to finance purchases in countries including Australia, Brazil and New Zealand with higher yields.

The Parker Global Strategies LLC CMI Currency Managers index, which tracks 20 currency funds with $10.15 billion in combined assets, is up 1.6 percent in 2010 after falling 1.2 percent last year. The 2009 loss followed seven straight years of gains averaging about 7.5 percent.

“In an ideal world, we’d have low volatility but trending markets, and the worst thing is high volatility and no trend,” said Dale Thomas, head of currencies at Insight Investment Management in London.

Rapid price swings can hurt company profits and make it harder for central banks to implement monetary policy.

“Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates,” the G20 said in its communique. “These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries.”

Governments in at least 10 nations have taken steps to limit financial markets from setting currency values this year to protect exports as world economic growth slows to an estimated 4.2 percent next year from 4.8 percent in 2010, according to the International Monetary Fund.

“Problems on a macroeconomic level between governments as well as at the policy level within countries are a recipe for more volatility,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. “The stakes are going to be raised and the arguments will grow all the more heated.”

Much of the emerging-market gains have come at the expense of the dollar, which depreciated last month to its weakest level since 2008 on a trade-weighted basis.

The dollar declined to as low as $1.3997 per euro Monday, before trading at $1.3986 in Tokyo from $1.3947 on Friday. The greenback fetched ¥80.60 from ¥80.40, after reaching ¥80.22, the weakest since April 1995, when it slid to a post-World War II low of 79.75.

The U.S. currency is down 5.3 percent in the past three months, according to Bloomberg Correlation-Weighted Currency Indexes, which show a 3.4 percent decline for the year, compared with a 5.9 percent drop for the euro and 13.3 percent gain for the yen.

Euro-dollar volatility fell to as low as 4.6 percent in 2007 as monetary policy around the world converged and global economic growth accelerated to 5.3 percent.

Now, decisions by China and other Asian economies to limit currency appreciation are adding to “significant exchange-rate misalignments” and tensions across the G20, the IMF said.

The Washington-based agency urged developing nations with current-account surpluses to let gains begin “in earnest.” Advanced economies must repair their financial systems at the same time and curb budget deficits in 2011 to help shift sources of global demand, it said.

Japan refrained from selling yen last month, the Finance Ministry reported Friday, showing the nation stepped back after intervening to weaken its currency in September for the first time in six years.

The Fed will likely announce that it will resume buying Treasuries this week, after purchasing $1.725 trillion of U.S. debt and mortgage securities in the first round of quantitative easing that began last year.

“There’s a lot of uncertainty about how they’re embarking on QE, the size and for how long,” said Paul Mackel, director of currency strategy at HSBC Holdings PLC in London. “It’s going to be harder for the market to discount what might happen at forthcoming Fed meetings. Volatility in the currency market is going to stay elevated for longer than people think.”

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