Sunday, February 08, 2004
A test of the G7's dollar resolve
Posted by David Smith at 11:43 AM
Category: Thoughts and responses

The Group of Seven appears to have come up with tougher language on stabilising the dollar than the markets expected. It remains to be seen whether there is any follow-through. Here's a straight report on what was agreed:

The Group of Seven finance ministers and central bankers signalled an attempt to halt the dollar's slide against the pound and the euro in Boca Raton, Florida, last night.

They called for more flexibility from countries which have been intervening in the markets to try to hold their own exchange rates.

That was interpreted by analysts as a clear signal that Japan, and to a lesser extent China, should allow their currencies to climb against the dollar. Both have been intervening in the markets to shift dollar-selling onto the pound and the euro. Since the last G-7 gathering September the dollar has fallen by 10%.

"We have had positive and constructive talks that have led to an agreement," said Chancellor Gordon Brown, who attended with Bank of England governor, Mervyn King.

In a statement the G-7 - comprising America, Britain, Canada, France, Germany, Italy and Japan - called for exchange rates to reflect underlying economic fundamentals and said countries would co-operate to prevent disorderly currency markets.

"Excess volatility and disorderly movements in exchange rates are undesirable for economic growth," it said. "In this context we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility."

Sterling is at an 11-year high of $1.85, while the euro has rise 50% from its lows 18 months ago. The hope is that the statement will halt the rise of both the pound and euro against the dollar, although markets are likely to remain sceptical.

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