The Naples Summit: G7 economic leaders ignore plunging dollar
Monday 11 July 1994
Mr Bentsen said intervention in the currency markets 'can be effective under proper conditions' - an apparent attempt to avert a further sharp plunge of the dollar on the foreign exchanges today.
Edmond Alphandery, the French Finance Minister, added: 'We have no intention of informing the markets beforehand of what we are going to do.'
But these remarks do not amount to pulling a double-bluff on the markets. Leaders of the world economic summit chose to ignore the sliding dollar after finance ministers decided that it was pointless to pursue active currency management on the foreign exchange markets.
Kenneth Clarke, the Chancellor, said ministers had no plans for any big new initiative on exchange rates. The G7 cooperated on currencies from time to time 'but we are not in the business of having great new initiatives on exchange rates at this particular G7 nor, so far as I am aware, for the foreseeable future.'
The decision to brush aside the dollar's plunge is the latest sign that the G7 have abandoned efforts to manage currencies or set fluctuation targets as they did in the 1980s. Senior G7 officials said central banks would interevene in thinly traded markets when currency swings become exaggerated, or on occasion to reinforce a major economic policy change. But the clear message of the Naples Summit was that countries would focus on long-range currency stability .
As foreshadowed by several ministers in the run-up to the Naples summit, the economic communique omitted any reference to the currency markets or the dollar. French President Francois Mitterrand said the leaders left the debate on markets to their finance ministers. John Major made clear that the leaders' discussion of markets was brief and he declined to offer any comment on the dollar's renewed weakness.
But in lengthy talks over the weekend finance ministers, with the blessing of the G7 leaders, agreed on a private 'guidance note', seen by the Independent, when answering questions on the currency markets.
It stated that recent currency movements were 'not in line with the basic conditions prevailing in our economies and, thus, a further weakening of the dollar is neither desirable nor justified.' Such language was repeated almost exactly by Theo Waigel, the German Finance Minister. Mr Bentsen later repeated his desire to see a stronger dollar.
The note said G7 economies were basically sound, and conditions for lasting non-inflationary growth were in place. It pointed out the US budget deficit was being sharply reduced and investment-led recovery was under way.
Dollar to fall, page 29
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