As the Naples summit began, President Bill Clinton said that there was little that the Group of Seven (G7) could do to shore up the value of the dollar, which has plunged to record lows against the Japanese yen in the past few weeks. The dollar promptly renewed its slide after the President's remarks.
Mr Clinton said: 'The best signal we can send the markets is that we are working together to promote growth.' His message was that central bank intervention to defend the dollar usually did not work, and that the markets would push up the dollar if they accepted that the US was heading for a period of sustained economic growth and low inflation.
Mr Clinton - who earlier held inconclusive talks with Tomiichi Muruyama, the new Japanese Prime Minister, on opening up Japanese markets - added: 'If Japan opens its economy and grows, we will see the currency problem resolved.'
Mr Murayama, 70, was later taken ill at the leaders' dinner. He was treated in hospital for diarrhoea and dehydration.
The US President also ruled out a big rise in interest rates, despite a sharp increase in US employment, which has fuelled inflation fears. He said nothing should be done to hinder continued economic growth.
Another intractable issue before the seven was the murder of seven Italian sailors off the Algerian coast on Thursday. The French and Italian leaders will demand that the other five commit aid to support the Algerian government in its battle against Islamic extremists. The security of the Mediterranean region - and fear of mass migration from North Africa to Europe - has forced itself on to the agenda.
Bosnia, Rwanda and Yemen will also feature in the Naples talks. The civil war in Yemen will be given added weight in the deliberations as a result of a surprise visit by Prince Bandar of Saudi Arabia, who flew in to hold a private meeting with John Major. Summit sources said the Saudis, having supported the now defeated south in the civil war, were at a loss to know what to do next.
British sources indicated last night that there might also be a shift in western policy on the arms embargo on Bosnia, if the Bosnian Serbs failed to agree to the latest proposals for dividing the country.
Currency and bond markets reacted to President Clinton's remarks with a sharp dive. Steven Nagourney, a strategist at the New York stockbroker Lehman Brothers, said: 'The dollar is heading for more historic lows, but when it will reach the bottom I have no idea.'
By lunchtime in New York, the dollar had fallen below DM1.56 - seen as an important psychological barrier - but closed at 1.5610.
America's Federal Reserve ignored one opportunity to raise interest rates at a regular meeting earlier this week, but traders said the pressure would continue until it did act.
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