View from City Road: Naples sees death of dollar deals

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The Independent Online
See Naples and Die runs the adage. A highly appropriate one it was, too, last weekend. The World Economic Summit marked the final burial of the G7's decade-long efforts to manage the global foreign exchange markets.

Everyone wants the dollar to stabilise, even strengthen a bit. But finance ministers seem determined not to do anything about it. Certainly there is going to be no more excitement by way of grand currency plans.

Intervention isn't ruled out, of course, but the G7 agreed last weekend to intervene only when markets were thin or to reinforce a major change in policy. Everything has its day. The age of co-ordinated interest rate changes, of massive central bank intervention to support weaker currencies, is apparently over. Does it matter all that much?

Back in the early 1970s world leaders certainly thought so. They were desperate to end the recurrent dollar and sterling crises which characterised the turbulent new world of floating exchange rates after the collapse of the Bretton Woods fixed exchange rate regime. The fear then was that wild swings in currencies disrupted trade and could also prove inflationary for weak-currency countries like the US and Britain.

Since then currency management has never been far from the policymakers' lips. Ronald Reagan briefly flirted with a more free-market, liberal approach but, as with so many other policies, he eventually flip- flopped. In September 1985 he authorised the Plaza Accord in which the five leading industrial countries agreed to drive the dollar lower.

After that, in February 1987, came the Louvre Accord to stabilise the dollar inside agreed ranges. For several months massive quantities of intervention helped to steady the dollar. That died with the 1987 crash.

Other experiments in currency management have persisted - most notably and disastrously in Europe - but on the whole G7's appetite for it has waned. Today, quite understandably, there is none. Currency management is no more than a cosmetic solution to underlying problems that require more dramatic surgery - that seems to be the general view.

First get your economic policies right is the message from G7. Stable currency markets will follow. The trouble is that the markets don't think US policies are right. Savings are too low, upward pressures on the budget too high. And they remain to be convinced that inflation is under control.

Does a weak dollar matter to anyone but American tourists abroad in any case? The US is a relatively closed economy. These days big corporations which need currency stability are able to hedge against virtually all eventualities. Besides which this can hardly be described as a dollar crisis yet. Even if it becomes one, the G7 won't be tempted back into currency management. The cure will be American policy changes.

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