Markets braced for a falling dollar: G7 assurances and talk of further intervention look unlikely to stop further pressure on US currency

FINANCIAL markets are preparing for another potentially disruptive bout of dollar weakness after the Group of Seven summit of industrial nations in Naples failed to announce a rescue plan for the sagging US currency.

As the summit ended yesterday, finance ministers said only that they would hold more regular meetings and try to increase economic co-ordination.

Analysts thought this assurance would not be enough to stop the dollar coming under further pressure, with the uncertainty sure to spill over into world bond and equity markets.

Neither were they convinced by hints from Lloyd Bentsen, US Treasury Secretary, that further offical, co-ordinated intervention in the currency markets to buy dollars was possible.

Mr Bentsen said yesterday that finance ministers had been in touch with their central banks over the weekend, although he did not spell out what they had discussed. He insisted that the US wanted a stronger dollar and that G7 was united and would act on currencies when appropriate.

Yohei Kono, Japan's Deputy Prime Minister, added that a further decline in the dollar would not be justified.

Despite these comments, it was clear that Germany, satisfied with the current exchange rate between the dollar and mark, remained reluctant to intervene. It regards the fall in the dollar against the yen as a matter for the US and Japan alone.

The G7 central banks' last attempt to support the US currency, spending dollars 2-3bn just over two weeks ago, failed.

Robert Thomas, currency strategist at NatWest markets, said: 'The dollar is not the top US priority. It will go down in the short run because there is nothing to support it.'

Gerard Lyons, chief economist at DKB International, said: 'It's inevitable that the dollar is going to go weaker, bond yields are going to go higher and equity markets are going to look fragile.'

Expectations of what the summit could produce had been low because of policy differences that emerged in the build-up, so the disappointment was muted.

However, June inflation and retail sales statistics for the US, due out during the next few days, will help keep bond and currency markets jittery.

The figures are likely to show the US economy growing strongly with inflationary pressures on the increase.

Traders reckon US interest rates will end the year higher but do not expect any immediate rise. NatWest's Mr Thomas said: 'The Federal Reserve will wait and see what the reaction is this week.'

Roger Bootle, chief economist of Midland Global Markets, said: 'The US authorities will not want to be seen reacting to pressure on the dollar.

'They would also want interest rate cuts in Japan and Germany, and the Germans are not going to play ball.'

Analysts said UK shares were likely to decline in reaction to international developments. Rising bond yields will depress equity prices.

Andy Hartwill, strategist at Paribas, said: 'There's very little concentration on fundamentals and corporate results.' He predicted this discomfort would persist until the international uncertainties were resolved.

Nick Knight, strategist at Nomura, said: 'The only thing that's going to help (the dollar) is higher rates. Jaw, jaw is no good. I don't think even a 11 2 -point rise in (US) rates is going to be enough. We could see real downward pressure on the market next week.'

Paul Walton, equity strategist at James Capel, said if no action followed the G7 meeting, 'things could look very sour. It would show that the policy of benign neglect is continuing and the dollar could get dumped.'