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Business Comment: G7 'read my lips' declares open day on dollar as G7 says read my

Watch what they do, not what they say. This was the currency dealers' eminently rational reaction yesterday to the flow of comments and communiques from ministers, bankers and assorted officials gathered in Washington.

International officialdom says the dollar has gone far enough. It is not too strong, but as strong as they'd like. However, there is no sign that the G7 central banks will risk selling dollars for yen and marks when the economic fundamentals mean they would almost certainly make a loss on the transaction.

In these circumstances, the G7 statement is an invitation to the markets to push the dollar as far as they can, and traders are accepting the challenge. As long as the American economy is expanding so much faster than Japan and Germany, and until this growth causes its foreign trade deficit to balloon again, the US currency will tend to climb. Japan would need to raise its own interest rates unexpectedly if it really wanted to puncture the dollar balloon, which because exports are about the only thing driving the sluggish Japanese economy right now, it plainly does not.

The weekend's meetings of the G7 and IMF also brought a warning of turmoil on the foreign exchanges if the single currency project is delayed. Here again, the fundamentals will rightly carry more weight than the officials.

It is fudge or failure, not delay, that will invite speculative attacks on the weaker currencies in the foreign exchange markets. If any of the more peripheral European countries are going to be shoehorned into EMU for political reasons when they have not yet slimmed their budget deficits enough to fit, or if any of them does not make the expected progress on the fiscal front this year, then they will become vulnerable to attack. There is quite a good chance of EMU-related currency turmoil during the next 12 months, but the markets will not be diverted from creating genuine havoc by an official attempt to channel it in a particular direction.