G-7 members downplay chance of new dollar agreement

Financial markets, nervous for weeks that the meeting in Boca Raton on Friday and Saturday would agree either words or action to buoy the weakening dollar, are now betting a lack of consensus among the seven will scupper any concrete initiative.

The dollar, which is down about nine per cent against a trade-weighted basket of world currencies since G-7 finance chiefs last met in Dubai in September, skidded to a three-year low on the yen and dropped one per cent on the euro yesterday.

Japan's Finance Minister Sadakazu Tanigaki said earlier yesterday the performance of the recovering world economy and structural issues underlying it would have more weight than currency issues at the annual February gathering.

"Macroeconomy, structural issues - these will have the most weight in the discussions," Tanigaki told a news conference. His comments echoed those of US Treasury Undersecretary John Taylor, who said on Monday G-7 commitments to lift economic growth in all areas would dominate the weekend gathering.

"The agenda for growth, which is a very important initiative launched in Dubai back in September, will be the focus of the policy discussions at the G-7 meetings," he said, declining even to comment on currency issues. Renewed dollar weakness yesterday indicated currency traders now believe no new agreement on foreign exchange will emerge from the Boca Raton meeting of finance ministers and central bankers from the United States, Japan, Germany, France, Britain, Italy and Canada.

In the absence of that, huge US trade and budget deficits are likely to see the dollar resume its slide, they said. As long as these deficits continue to expand, the dollar will need more and more foreign investment into the United States and its assets just to keep the exchange rate steady.

Economists reckon a cheaper dollar may attract foreigners back to US markets while easing the country's trade deficit by boosting US exports and limiting imports. But official purchases of dollars by Asian governments in particular, aimed at keeping their local exports competitive in US markets, is complicating the adjustment by making dollar losses uneven and artificially funding US budget gaps.

"People are beginning to realise there won't be much coming out of the G-7 that will change the dollar's weak trend," said M Barth, global currency strategist at Citibank in London.

"The US has made it clear as long as the dollar's decline is orderly, it is beneficial all round by helping disinflation and current account problems."

The stance of the US and Japan, which was suspected by currency traders of intervening yet again to buy dollars for yen yesterday, is in contrast to European concerns the euro is taking the heat from dollar depreciation. At the very least, euro zone delegations are expected to seek to add a phrase to the G-7 communiqué that says excess volatility on the currency markets is unwelcome.