G7 shifts policy to reflect alarm over the dollar

Finance officials from the world's richest nations condemned "excess volatility and disorderly movements in exchange rates" on Saturday, a formula of words that pleased euro zone officials but gave no guarantee that Washington would do anything to stop the long decline in the US dollar.

At the same time the two-day meeting of the Group of Seven (G7) agreed that the global economic recovery has "strengthened significantly" in recent months, and world growth projections for 2004 had been raised to their highest for three years.

The summit was held at the exclusive Boca Raton Resort and Club in southern Florida where officials from the US, Britain, Canada, France, Germany, Italy, Japan and the EU mingled with vacationers to get to meetings.

The communique marked a shift in G7 currency policy to reflect alarm at the decline of the dollar, which has strengthened the euro to near-record levels and is driving up the cost of exports from the euro zone.

A weak dollar helps stimulate the US economy and reduce unemployment by boosting exports, important factors in a year when the President is seeking re-election.

The communique said: "We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth." Mr Jean Claude Trichet, president of the European Central Bank, said "it was a very good meeting and a very good communique", and Italian Finance Minister Mr Giulio Tremonti, in sentiments echoed by his French and German counterparts, said: "We got exactly what we wanted."

In his post-summit press conference, US Treasury Secretary Mr John Snow gave no indication however that the US would take any action to halt the dollar's slide which has helped lift US exports by 19.1 per cent in the final quarter of 2003.

Mr Trichet attended the meeting as part of an EU delegation that also included the Minister for Finance, Mr McCreevy, representing the EU presidency, and Mr Pedro Solbes of the European Commission.

At its summit in Dubai in September a communique urging "more flexibility" in currencies prompted a sell-off of the greenback which caused an upswing in the value of the euro by 10 per cent since then.

The markets had taken the Dubai communique to mean that the dollar should fall further against the euro, and the US came under pressure at Boca Raton to adopt a communique that focused more on finger-wagging at Asian economies for depressing their currencies.

In a swipe at China and Japan which have worked to keep down the value of their own currencies to combat the dollar's decline, the G7 said that it was desirable for countries that lack flexibility in exchange rates "to promote smooth adjustments in the international financial system". The Chinese yuan is pegged to the US dollar, giving Beijing no flexibility in setting exchange rates. Neither Mr Trichet nor Mr Snow would say after the meeting whether China specifically was being ticked off.

Mr Trichet merely said, when asked by The Irish Times if the communique referred to China, that there were several countries that did not have flexible exchange systems. At a separate press conference Mr Snow responded to the same question that the communique "is written in fairly plain English, and I think it speaks for itself".

Japan has been buying huge amounts of dollars to keep the yen from increasing and to maintain its export levels. In January alone the Bank of Japan purchased $66 billion worth of the US currency. Since Dubai the yen has slipped 7 per cent against the dollar, compared to 10 per cent against the euro.

The massive borrowing needs of the US because of its huge US currency account deficit was also a subject of concern at the meeting. The US trade gap has grown to a record $500 billion a year and EU leaders believe that a main reason the US is allowing the dollar to slide is to help reduce its soaring budget deficit.

Mr Snow told his counterparts that the US had a plan to reduce by half the US budget deficit over the next five years - an assertion that has been criticised as unrealistic by US analysts because of the Bush administration's large tax cuts and the cost of the conflicts in Afghanistan and Iraq.

Finance ministers will be watching the currency markets closely this morning for reaction to the communique. Analysts forecast that the statement could slow the dollar's decline in the short term in a less feverish market, but may not change a long downward trend.

"This means, in all likelihood, that a fundamentally driven, orderly dollar depreciation is likely to continue," said Mr Dan Katzive, a foreign exchange analyst at UBS Securities.

The markets will also be looking, however, for any hint that the ECB might intervene and buy dollars if the slide continues.