Key members of the Group of Seven richest nations, whose finance ministers meet in Florida later this week, threw cold water on Tuesday on speculation about an agreement to arrest the U.S. dollar’s recent steep decline.
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 percent against a trade-weighted basket of world currencies since G7 finance chiefs last met in Dubai in September, skidded to a three-year low on the yen and dropped one percent on the euro on Tuesday.
Japan’s Finance Minister Sadakazu Tanigaki said earlier on Tuesday 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 U.S. Treasury Undersecretary John Taylor, who said on Monday G7 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 G7 meetings,” he said, declining even to comment on currency issues.
Markets react
Renewed dollar weakness on Tuesday 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 U.S. 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 U.S. markets while easing the country’s trade deficit by boosting U.S. exports and limiting imports. But official purchases of dollars by Asian governments in particular, aimed at keeping their local exports competitive in U.S. markets, is complicating the adjustment by making dollar losses uneven and artificially funding U.S. budget gaps.
“People are beginning to realise there won’t be much coming out of the G7 that will change the dollar’s weak trend,” said Marvin Barth, global currency strategist at Citibank in London.
“The U.S. 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 U.S. and Japan, which was suspected by currency traders of intervening yet again to buy dollars for yen on Tuesday, 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 G7 communique that says excess volatility on the currency markets is unwelcome while adding a call for a greater sharing of the dollar decline.
This is because the dollar’s loss of more than 12 percent against the euro since September is the highest against all major currencies and European governments are concerned this could stifle the primarily export-led recovery in the euro zone.
Euro zone governments have complained that the Dubai G7 statement seeking “more flexibility in exchange rates” was interpreted as a green light for markets to sell dollars for euros because other countries actively opposed dollar losses.
Asian economic giants such as Japan, China and South Korea, to which the statement was addressed, either continue to intervene to limit dollar losses or continue to fix currencies to the U.S. unit. A major problem for G7, however, is that neither China nor other Asia economic powerhouses outside Japan are party to G7 agreements and gatherings.
“In terms of raising the issue and persuading China to react, I think the aim has been achieved,” said a senior Japanese finance ministry official on Tuesday.
International Monetary Fund managing Director Horst Koehler said on Monday all major economic areas should share the burden of the dollar’s deficit-driven adjustment, but he also said Europe should not panic over the extent of recent moves.
“We expect no major revision in the G7 statement, so prefer to go dollar short for now,” said Trevor Dinmore, foreign exchange strategist at Deutsche Bank.
