G7 divided on new strategy for currencies: European leaders rule out possibility of further action to bolster US dollar

CURRENCY markets look set for further instability after divisions opened yesterday among the leaders of the Group of Seven industrial nations on the eve of their Naples summit.

The Bundesbank chose not to cut the main German interest rate at a meeting yesterday and the dollar rose slightly against the mark and the yen, closing at DM1.5730 and Y98.85 in London.

The French Prime Minister, Edouard Balladur, called on the US to raise interest rates. 'We would like to tell the United States that it is up to them to take all necessary measures, particularly concerning interest rates, to stop the weakening of the dollar,' he said.

Other countries were keen to play down hopes of a concrete plan for currencies emerging from the summit. German and Japanese officials said there would be no specific discussion of the dollar, both arguing that the currency movements reflected America's budget deficit and low savings rate.

The Italian Prime Minister, Silvio Berlusconi, yesterday shored up opposition to a Group of Seven rescue package for the ailing US currency by declaring there was little point in launching a co- ordinated defence.

Mr Berlusconi said: 'Personally, I am not at all concerned about the weakness of the dollar, which delivers advantages for US exports. I don't think there is a great possibility for co-ordination of intervention between central banks because of the great flux of money on the international money markets.'

While President Bill Clinton has ruled out any 'unusual actions' to defend the dollar, his administration is thought to be split on the issue. The Treasury Secretary, Lloyd Bentsen, has openly called for a stronger dollar and rejected a devaluing currency as a weapon in the US trade dispute with Japan.

The markets were also divided over whether the US authorities would soon raise interest rates in order to try to steady the US currency, which has fallen sharply in recent weeks, but agreed that instability would persist.

Malcolm Roberts, head of bond research for UBS, said the Federal Reserve was unlikely to act because a move would be ineffective. The currency markets were already expecting an interest rate increase and would continue to test the authorities' resolve.

Glenn Davies, chief economist at Credit Lyonnais Securities, expected a quarter-point increase in the Federal Funds rate, to 4.5 per cent, as a reaction to employment figures due today.

He said the figures would be buoyant and give a domestic excuse for action to help pacify the foreign exchange markets.

Most analysts think the rate will have to rise to 6-6.5 per cent to achieve stability.