CURRENCIES : G7 finance officials look for a few dollars more

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The Independent Online
THE European finance officials convening at the Group of Seven economic talks in Washington this weekend are seeking more of the same: a US dollar that hovers at, or maybe a little above, current levels.

Finance ministers and central bankers from the seven nations include delegations from two member states, France and the UK, that face general elections next month. A third, Germany, has an election next year.

That alone makes it unlikely that Europe will rock the monetary boat. Moreover, the strong dollar is giving a much-needed boost to the continent's export-driven economies and enhancing prospects for European currency union in January 1999.

"The G7 participants will agree - without saying it openly, of course - that the dollar should either continue to rise, or stay where it is," said Guillaume Sciard of BZW Gestion France in Paris. "Growth in Europe is too fragile to sustain a dollar decline."

Last week, French President Jacques Chirac called early parliamentary elections for 25 May and 1 June. If, as opinion polls indicate, his ruling coalition wins, a new cabinet will be formed, and Finance Minister Jean Arthuis is considered likely to lose his job.

"I don't think there'll be any strongly worded comment coming from any European country," said Andrew Milligan, the economic adviser to GA Investments. "They're likely to reaffirm that currencies are valued fairly at the moment."

Since it hit a low in the spring of 1995, the dollar has risen 29 per cent against the mark and 15 per cent against the franc.

In both Germany and France, the dollar's surge has spurred exports, which in turn have acted as the chief engine for economic growth and improved both countries' chances of qualifying for EMU.

Deficits, in particular, must be brought down to 3 per cent of gross domestic product - a condition which Germany and France, the European Union's core members, are finding hard to meet. And without dollar-induced export growth, their economies might not expand enough to drive the deficit down.

France's deficit stood at 4.1 per cent of output last year, and Germany's at 3.9 per cent. According to IMF forecasts released last week, both countries will overshoot the target this year, with their deficits hitting 3.3 per cent.

At the Berlin G-7 meeting in February, policy-makers welcomed the dollar's rise, although they signalled that they did not wish it to rise much further and called for stability in major exchange rates. They declared "major misalignments" in the dollar's value "had been corrected". Since that time, however, the dollar has gained another 2.3 per cent against the yen, and 3 per cent against the DM.

Although that is causing some concern, no consensus has developed on a need for a policy change, or central bank action to enforce existing policy.

French government officials last week said there was no reason why the Berlin message should be outdated. They added, though, that a stronger dollar would not be unwelcome, either.

German Finance Minister Theo Waigel said on Thursday that a strong dollar was supporting the economies of continental Europe and keeping inflation at bay in the US.

However, Bundesbank president Hans Tietmeyer said recently he was "not interested" in a further depreciation of the DM, a sign that the German central bank would not mind seeing the dollar's rally slow down. Copyright: IOS & Bloomberg