Posted on 02/08/2004 6:59:23 AM PST by Orangedog
G-7 meeting: Excerpts from the joint statement 10:35pm ET 02/07/04
The mix of words is seen giving the three major economic blocs, the United States, the European Union and Japan, want each wanted heading into the weekend meetings.
Support for the statement was unanimous, U.S. Treasury Secretary John Snow said, "all of us are happy with it."
The ministers' view may leave financial markets confused, said analysts.
Most expect the bruised U.S. dollar to rise Monday, but the greenback may then resume its decline. The challenge of bringing U.S. trade and budget deficits into balance will preoccupy investors once again, said David Gilmore, analyst with Foreign Exchange Analytics.
"We reaffirm that exchange rates should reflect economic fundamentals," financial authorities from the world's seven industrial powers said in their eagerly anticipated communique. "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth."
With those words, European officials were comforted. They've been bristling over the euro's 12 percent gain to record highs vs. the dollar since the G-7 called for exchange-rate flexibility at its last meeting in September.
The language was intended to deter currency market intervention by Asian nations but instead was taken as a signal by markets to sell the dollar against a host of currencies, as investors bet European and U.S. officials would do little to stop the dollar's fall after stressing hands-off "flexibility" in such a high-profile venue.
"We continue to monitor exchange markets closely and cooperate as appropriate," Saturday's statement continued. "In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms."
The United States was insistent that a call for flexibility remain in the statement.
Snow repeated that markets are the best venue for determining exchange rates.
Because a weaker dollar helps U.S. exports by making American goods more attractive on global markets and may improve President Bush's chances for reelection, the United States was seen supporting a renewal of the September statement.
The U.S. remains critical in particular of China's currency peg to the dollar, which keeps the yuan artificially low and Chinese-made goods cheaper.
Should the call for flexibility resonate with Asian authorities, the dollar is likely to decline further. But Snow stressed Saturday that because markets are determining the value of the currency, this is not in contradiction to the White House's preference for a "strong" dollar, a view Snow also repeated at the G-7 conclusion.
Japan is not the target of the Group of Seven's call for more flexibility in exchange rates, Japanese Finance Minister Sadakazu Tanigaki said at a press conference following the release of the G-7's statement.
"Japan is not at all the country which lacks flexibility in currencies," he said.
Tanigaki said he earlier told U.S. Treasury Secretary John Snow that intervention is used only in response to speculative moves in the market, and is a policy choice he believes should be at the discretion of individual countries.
His view signals Japan is not likely to halt intervention.
Tanigaki was also asked how markets would interpret the statement. "It's up to the market, and beyond our control how the markets should interpret this expression."
The dollar has surrendered 7.5 percent against the yen, with the dollar worth 115 yen just after the Sept. 20 G-7 meeting and hitting a 3 1/2-year low around 105.20 this week. The decline would have been steeper were it not for record spending on intervention.
Investors have been selling dollars on concerns the United States is vulnerable to a reversal of the foreign capital flows that have so far financed its record trade and federal budget shortfalls.
"Keep in mind with U.S. monetary and fiscal policy squarely aimed at fostering strong domestic demand, the avenue for adjustment in the U.S current account deficit remains the dollar," said Gilmore. He thinks stronger U.S. economic growth will only increase consumer appetites for foreign-made goods, putting more stress on the dollar.
Adding to dollar pressure, U.S. interest rates remain at four-decade lows and the Federal Reserve has pledged patience with raising rates. Low rates makes U.S. investments less inviting for foreigners.
"The statement of Dubai caught a lot of people off guard. This time around they spent a lot of time on the wording, they learned form Dubai that anything out of the ordinary can rattle the markets," said Joseph Quinlan, chief market strategist with Bank of America.
"We'll get back to the dollar drifting lower until we get some news or big data," he said, adding that trade figures are now likely to take on even greater importance.
U.S. officials have said the dollar's decline to date has been orderly, but some observers said the tweaked wording probably reflects broad concern - Europe and Japan have made their feelings clear -- for what's transpired over the past few months.
"I think the Europeans will say it means that the dollar has fallen too fast, and the argument could be made that the Europeans could jawbone or even intervene to slow the decline of the dollar," said Sung Won Sohn, chief economist with Wells Fargo & Co.
"If I were a trader, I would say Boca Raton validated what is already a fait accompli. There is nothing in the statement that said we should arrest he significant decline in the dollar," he said.Rachel Koning is a reporter for CBS.MarketWatch.com in Chicago.
There isn't any real evidence that the cheaper dollar has had any material impact improving exports. To the extent the lower dollar limits imports by making them more expensive, I doubt that domestic consumers will view it as positive.
Why would any investor hold liqudity in the form of dollars at less than 1% when it could hold the same liquidity in Euro's or pounds at rates close to 3% with upside on the exchange rate?
Reason this pronouncement is likely to have adverse economic impact is that foreign exchange markets are likely to view it as a committment to continued declines in the value of the dollar which is likely to provide further incentives to convert dollar liquidity to other monetary assets.
I don't think the G-7 can make a trend, but it can steer a trend. The currency markets are huge as is the world economy. It is too much to expect a couple dozen movers and shakers can irrevocably determine international finance.
You may want to listen to the first hour of Roger Arnold's show from this morning. He has been making the case for the ECB scrapping their inflation targeting and lowering sooner rather than later better than anyone else I have heard.
The bigger question in my mind is how much longer the Japanese are going intervene with the same level of intensity. If the USD continues its relatively linear descent, it will be near 75 by the election.
Japan has budgeted somewhere near $720 billion dollars (too lazy to convert to yen right now) just for this year to keep the dollar from dropping any further against the yen....nearly 3/4 of a trillion dollars (ACK!). They are past the point of no return and moving over the cliff right along with us. As soon as the Japanese, the main funder of our deficits, stop propping up the dollar, that's when the music stops and everyone starts running for the chairs.
If the euopeans raise their inflation target (or scrap the whole inflation targeting scheme altogether) and the ECB lowers, then we will certainly see a drop in the euro. But that will be a short-term situation IMO. I think we could see 150 within a few months (or even weeks) of a move to 120 or lower. But that's just me, and I haven't even been able to time a stock trade right in 6 weeks ;)
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.