Ministers condemn dollar volatility

G7 Summit: Intervention to curb currency fluctuation is agreed, with help from the Asian economies
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The Independent Online

The dollar moved ahead in early foreign exchange trading this morning after this weekend's G7 summit. Finance ministers of the world's leading economies launched a dramatic bid yesterday to curb the slump in the dollar against the euro and force Asia to share the pain caused by the recent massive moves on the foreign exchange markets.

In an unexpected victory for European politicians, the Group of Seven nations (G7) condemned "excess volatility" on the global money markets and hinted that they would be prepared to intervene to prevent sudden currency movements from upsetting the strong economic recovery.

Analysts said the statement would put a floor under the dollar's fall but warned of further volatility as speculators sought to test whether the G7 had implicitly agreed to act in concert when - or if - the dollar started to tumble against the euro.

After 24 hours of negotiations at the Florida beach resort of Boca Raton, the G7 said: "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and co-operate as appropriate."

The statement from the US, Britain, Canada, France, Germany, Italy and Japan was seen as a calculated effort to redress the impact of their announcement in Dubai last September urging "more flexibility" in currencies - which prompted a dollar sell-off that took its value down 12 per cent against the euro. "Europe won the battle of Boca, but the currency war is far from over," said Mark Cliffe, head of economics at ING Financial Markets. "The inclusion of a reference to the undesirability of 'excessive volatility' in exchange rates represents a victory for European policy makers."

This time the communiqué stated baldly for the first time that the G7 wanted "major economies or economic areas that lack flexibility" to allow currencies to adjust "according to market mechanisms". Analysts said this was directed at China, Japan and other Asian nations such as South Korea and Taiwan. China has benefited by keeping its renminbi pegged at a cheap rate to the dollar and Japan has intervened to keep the yen from rising.

European leaders were patently delighted at the change in the communiqué's wording. Jean-Claude Trichet, the president of the European Central Bank who had last month attacked the "brutal" surge in the euro, hailed it as a "very good communiqué and particularly a very good paragraph [on currencies]". He said repeatedly that there was "consensus" on the G7. Asked whether he felt the G7 communiqué was an efficient tool in dealing with huge currency moves, he said: "The G7 is there to reflect and check that we share a common and consensual view on what should be done to help growth and job creation, stability of global growth and prosperity in general."

M. Trichet said the communiqué's call for more flexibility in the exchange rates of countries where it felt flexibility was lacking applied to more than one Asian country. "The various currencies that are not flexible will recognise themselves. There is not only one, there are quite a few," he said.

By contrast John Snow, the US Treasury Secretary, was reluctant to answer directly any questions about the dollar's value. "A strong dollar is in our national interest," he said. "But the value of currencies is best established in open and competitive currency markets. Nobody can devalue their way to prosperity. An official prop under a currency doesn't make it a strong currency."

Francis Mer, the French Finance Minister, said the communiqué rectified the message given to current markets last September in Dubai. "The markets seemed to have believed that we all wanted a rise in flexibility and particularly regarding the euro versus the dollar, which was not the thrust of what we were thinking of in Dubai," he said. Charlie McCreevy, the Irish Finance Minister and chair of the eurogroup of ministers, said: "The statement is what the G7 agreed and I am sure it will be welcomed by us." Gordon Brown, the Chancellor of the Exchequer, who has stayed clear of the three-way US-eurozone-Japan debate, said only that he thought "exchange rates should reflect economic fundamentals". But he insisted the wording of the communiqué had found widespread agreement.

Sadakazu Tanigaki, Japan's Finance Minister, applauded the wording of the communiqué, which would deflect speculation that the yen would be the next target for speculators. "Is Japan lacking currency flexibility? That is not the case," he said. "The Japanese currency has fluctuated widely... moving roughly as much as the euro has since September. Therefore, Japan is not one of the countries ... lacking flexibility and that was understood at this G7 meeting."

Analysts said there was enough ambiguity in the communiqué and in ministers' comments for traders to test the G7's resolve. "Europe has put everyone on notice that it does not want the euro to appreciate much further," said Michael Derks, chief international strategist at Commonwealth Bank of Australia. "We can therefore expect that Europe will be more prepared to 'lean against' any further euro strength."

Analysts said the euro would be given short-term respite while the markets turned their attention to Japan as the only main free floating currency. "Doubtless the G7's communiqué will forestall a knee-jerk sell-off in the dollar against the euro," Mr Cliffe at ING said.

But economists said a vaguely worded statement would not be able to prevent the long-term devaluation most believe is necessary to help the US lower its record current account, trade and budget deficits.

Ray Attrill, director of research at the online analyst 4CAST, said: "My guess is that the markets will be hesitant to take the euro higher, at least initially. But I expect it won't last long and the market will want to test whether there is any bite [to the G7 statement]."