Commentary: Disunity over the dollar

The Group of Seven looks as divided as ever on the dollar. In some circumstances, differences of opinion on whether to manage the US currency might matter little. But today disunity looks unwise.

A low and falling dollar might very well boost US exports. Nor would the impact

on inflation be large, because the US imports relatively little. But at some point US insouciance towards the declining dollar may scare away the foreign investors needed to fund the payments and budget deficits.

For the Europeans a falling dollar is thoroughly uncomfortable. It could prolong economic stagnation by pricing them out of the huge American market. More crucially, a declining dollar means capital flows into the mark, which rises against other European currencies. Since they are committed to a target range against the mark, this puts upward pressure on interest rates across Europe.

Yesterday's intervention by 15 central banks probably threw twice as much into the fray as the surprise sortie in July, but it was less effective. The intervention was not helped when a senior Bundesbank official said his bank had no target for the US currency. After all, intervention only has a substantial influence on currency movements if it is a signal that it will be backed up by monetary or fiscal policy changes, as in the mid-1980s.

But there is no hint that either the US

or the Bundesbank intends to alter interest rates one jot to take account of the DM-dollar exchange rate. With German three-month interest rates at more than 9.75 per cent and America's at little more than 3.25 per cent, the gap will stay large for some time.

If the Fed, panicked by the anaemic recovery, drops rates again the greenback could look even more liverish. And that is not yet taking on board the risk that President Bush may be defeated.