G7 warning fails to dampen the rising dollar
Tuesday 29 April 1997
Currency traders took the bland wording of the G7 communique to mean there was little danger yet of central bank intervention to halt the dollar's ascent.
"The G7 meeting has left the foreign exchange market in the mood to test official resolve to maintain stable exchange rates," said Stephen Lewis, chief economist at London Bond Broking.
The dollar reached its highest level against the yen for more than three years, and its highest against the German mark for four and a half years yesterday morning, before dropping back a little. It ended in London at DM1.7285 and 126.55, both up on Friday's close.
Analysts said there was little chance of a reversal in the currency's upward trend as long as the US economy continued to expand so much more robustly than Germany and Japan. Figures later this week for America's national output in the first quarter and for job creation this month are likely to confirm the markets in their expectation of a further rise in US interest rates next month.
Yesterday brought figures showing stronger than expected sales of new homes in March despite a drop from the previous month's high level, leaving the stock of unsold homes at its lowest in the US since April 1994. This is expected to boost housebuilding for the remainder of the year.
Gerard Lyons, chief economist at DKB, said: "It will require a change in economic fundamentals for the dollar to lose its attraction. The market will probably tread carefully, but it is hard to see any prospect of concerted intervention."
The fact that there are good economic reasons for the dollar's strength probably explained why the G7 ministers and central bankers did not go further in their attempt to talk it down.
The statement went only a little further than earlier signals that exchange rates have moved far enough. It added only a comment on "the importance of avoiding exchange rates that could lead to the re-emergence of large external imbalances," a reference to concerns about the growing US trade deficit with Japan.
"We're not at the stage yet where we can see the G7 is desperately worried about trade imbalances," said Stephen Hannah, director of research at IBJ International.
The central bankers meeting in Washington continued to try to talk the US currency down yesterday. Hans Tietmeyer, Bundesbank President, said: "The US is interested in having a strong dollar but not a stronger one. We are very much interested in having a strong DM, but not a weaker one." Nobody wanted the dollar to overheat, he added.
The G7 communique stressed the need for Japan to continue to deregulate its economy in order to boost growth. It said progress towards the single currency in Europe, and its implications for financial markets, would be monitored.
Eddie George, Governor of the Bank of England, said after the G7 meeting that there had been "no pressure" for the central banks to intervene directly in the markets by selling dollars.
Figures today for employment costs in the US are expected to show a pick-up in inflationary pressures, while tomorrow's preliminary estimate of GDP in the first quarter is likely to show the annual pace of growth climbing to 4 per cent or more.
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