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Section: Daily Dispatches

Currency 'Volatility' Worries G-7 Officials;
Finance Chiefs Give Europeans,
Concerned About Dollar's Fall, What They Want

By Paul Blustein
Washington Post
Sunday, February 8, 2004
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BOCA RATON, Fla., Feb. 7 -- Top economic policymakers
from the world's seven major industrial powers indicated
Saturday that they are concerned about the dollar's recent sharp
fall against the euro, issuing a statement denouncing quot;excess
volatility and disorderly movements in exchange rates.quot;

The statement, released after a meeting of finance ministers and
central bankers from the Group of Seven nations, marked a shift
in G-7 policy and a victory for European officials. The Europeans
have complained vociferously in recent weeks that the strength
of the euro, which is trading at a near-record against the dollar,
is threatening their economies by driving up the price of
European exports.

quot;We got exactly what we wanted,quot; Italian Finance Minister
Giulio Tremonti said in an interview with Bloomberg News,
echoing comments by his French and German counterparts.
quot;We're very satisfied.quot;

At the same time, the G-7 statement included wording that
was clearly aimed at prodding Asian export powerhouses,
particularly China, to end policies that keep their currencies
relatively low against the dollar. quot;More flexibility in exchange
rates is desirable for major countries or economic areas that
lack such flexibility,quot; the statement said.

Treasury Secretary John W. Snow, the chief U.S.
representative at the meeting, declined to say at a news
conference after the meeting whether the statement was
intended to refer specifically to China. quot;It's written in fairly
plain English, and I think it speaks for itself,quot; he said.

The finger-wagging at Beijing may take a little heat off the
Bush administration concerning China's export prowess
and penetration of the U.S. market, which has become a
hot political issue in the United States amid heavy losses
of U.S. manufacturing jobs. The alleged unfairness of
Beijing's currency policy has prompted protests by U.S.
politicians and industrialists.

China was not represented at Saturday's meeting, which
took place at the posh Boca Raton Resort and Club. The
G-7 nations are the United States, Japan, Germany,
France, Italy, Britain and Canada.

G-7 statements are minutely parsed by currency traders
and can influence currency values, because governments
sometimes back up their words with substantial purchases
and sales of currencies by their central banks.

But no such actions were promised in Saturday's statement,
beyond the group's usual admonition that the member
governments would quot;cooperate as appropriate.quot;

As a result, analysts voiced skepticism that the G-7 could
stop the dollar from falling further in months ahead, in light
of the giant U.S. trade deficit.

The trade gap has swelled to a record annual level of about
$500 billion, which many economists consider a gauge of
how the United States has been collectively living beyond
its means. A lower dollar helps shrink the trade gap -- and,
in effect, adjust U.S. living standards to a more realistic
level over the long term -- by making U.S. exports cheaper
on world markets and increasing the price of foreign goods
imported into the United States.

quot;I can't imagine that this [statement] would have a major
effectquot; on the dollar's fundamental path, said Kenneth
Rogoff, a Harvard University economist who until recently
was chief economist at the International Monetary Fund.

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

Snow and other U.S. officials, while sticking to the mantra
that Washington favors a quot;strong dollar,quot; have largely
shrugged off concern about the dollar's drop, because a
cheaper dollar helps stimulate the economy and reduce
unemployment by boosting exports. But European officials
contend that their economies are bearing a disproportionate
share of the burden because the euro has been rising
especially fast against the dollar.

Before Saturday's meeting, Francis Mer, the French finance
minister, publicly demanded a change in the wording of the
statement issued at the previous G-7 conference, held in
Dubai in September. That statement said quot;more flexibility
in exchange rates is desirable,quot; a phrase that helped the
dollar's fall. The upshot, Mer contended, was currency
markets that quot;are feverish. ... We have to bring down the

U.S. officials agreed with the Europeans that the Dubai
statement had been misinterpreted in the markets as
suggesting that the dollar should fall against the euro.
For that reason, U.S. and European policymakers jointly
backed a new statement that puts more of the onus on
Asian nations to stop controlling their currencies to keep
them from rising.

The main focus of American and European concern is
China, which has long kept its currency, the yuan, fixed
against the dollar. But China's neighbors, whose currencies
are more flexible, have been buying massive amounts of
dollars to keep their currencies from increasing lest that
dampen demand for their exports. Chief among these is

It is highly uncertain whether the new statement will have
much effect on the Asians' policies. The Chinese government
has balked at revaluing the yuan any time soon. And despite
last September's call for quot;flexibilityquot; in exchange rates, the
Bank of Japan stepped up its intervention to record levels in
January, buying about $66 billion worth of U.S. currency.
That helped limit the dollar's decline against the yen since
the Dubai meeting to about 7 percent, compared with 10
percent for the euro.

Japanese Finance Minister Sadakazu Tanigaki was quoted
by Bloomberg News as saying that Snow, in a bilateral
meeting, quot;acceptedquot; Tokyo's policy of currency intervention.
Asked whether that was so, Snow hinted that Washington
is much less concerned about Tokyo's policies than Beijing's.
quot;The Japanese have agreed to this statement just as they
agreed to the one in Dubai,quot; he said.


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