G7 agreement aims to ensure stability of the US dollar

AN agreement struck this weekend by the Group of Seven industrial nations to try to stabilise the dollar faintly echoes the landmark Louvre accord it reached 10 years ago this month.

However, it is not nearly as ambitious as that now discredited pact, which unsuccessfully sought to hold currency rates in target zones intervention in the foreign exchange market.

"The Berlin message is not comparable to the ... Louvre accord," the German Finance Minister, Mr Theo Waigel, said after the meeting of G7 finance ministers and central bankers in Berlin.

In a statement the G7 countries - Britain, Canada, France, Germany, Italy, Japan and the US - signalled their desire for stability in the foreign exchange markets by saying that their currencies were no longer misaligned in a major way.

A stable dollar would help quiet US exporters' complaints that they are being put at a disadvantage on world markets. It would also help to buttress the shaky Japanese stock market and dampen any potential inflationary threat in Germany. The dollar closed in New York on Friday at just over 123 Japanese yen and 1.66 deutschmarks, well above the lows set in 1995 of just under 80 yen and just over 1.34 deutschmarks.

Although the G7 statement left open the possibility that it might intervene in the currency markets at some point to stabilise the dollar, finance ministers from several nations said not plan to do so was reached.

"We reached no agreement of that kind today. We didn't think it was necessary," the British Chancellor of the Exchequer, Mr Kenneth Clarke, said.

That however will not stop currency traders and speculators from trying to see how much of a movement in the dollar the G7 will tolerate - either up or down.

The US treasury secretary, Mr Robert Rubin, gave some indication of how much of a fall in the dollar he might be willing to accept when he declared that the US currency had been strong "for some time now". That remark appears to cover roughly the period of the last six months, back to the last G7 meeting, in Washington in September. At that time, the dollar was trading at about 110 yen and 1.52 deutschmarks.

A drop in the dollar back to those levels would clearly be welcomed by Japan, which has made no secret of its concern that the weak yen could trigger a massive sell off in the shaky Tokyo stock market, hurting its banks and its economy.

European countries have made equally clear that they would not be happy with a retracement of the dollar's gains of the past six months - despite suggestions by a senior US official implying otherwise.

"We are satisfied with the dollar," Mr Waigel said. "Six months ago, we noted an incorrect development with the dollar. We wanted a stronger dollar and that is what we have."