G7 focus swings to market storms

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THE WORLD Economic Summit will address the volatility of financial markets when leaders of the Group of Seven meet in Naples next Friday.

G7 officials confirmed that the subject had climbed up the summit agenda, in particular the potential damage to recovery prospects wrought by rising long-term rates following the plunge in bond prices.

Japan's Minister for Trade and Industry, Ryutaro Hashimoto, warned yesterday that the dollar- yen exchange rate was not only bad for Japan but also for the US. 'I think the issue of exchange rates will take a large part of the summit meeting,' he said.

The dollar yesterday closed little changed on the previous London finish at Y98.50 after dipping below Y98 - yet another post-war low - in Tokyo earlier yesterday. Against the mark, the dollar was slightly firmer at DM1.5920.

This weekend the Bretton Woods Committee - a group of former central bankers and finance ministry officials headed by Paul Volcker, former chairman of the US Federal Reserve - is sending its two-stage plan for a worldwide system of currency target zones to the summiteers before making it public on the eve of the summit.

The plan calls on the main industrial countries to achieve economic convergence prior to adopting flexible exchange rate bands.

However, Mr Hashimoto played down hopes of co-ordinated interest rate changes designed to stabilise the dollar just ahead of the G7 summit, which takes place from 8-10 July. The US Federal Open Market Committee meets next Tuesday and Wednesday amid speculation of another rise in short-term rates, from the current 4.25 per cent.

Fears of mounting US inflation pressures grew after the National Association of Purchasing Managers reported that its June prices index rose to 73.5 - the highest since August 1988 - from 71.5 in the previous month. But an unchanged index of May leading indicators led several economists to conclude that US expansion may be slowing.