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Section: Daily Dispatches

Pressure grows on G7 to agree acceleration dollar devaluation

By Allister Heath
The Business, London
Sunday, September 26, 2004

President Bush is being urged to signal a further
devaluation of the dollar of up to 20 percent to
rebalance the global economy, ahead of Friday's
Group of Seven (G7) and International Monetary
Fund meetings in Washington.

Senior U.S. administration officials in Washington
have over the past few days tried to influence the
White House and the Treasury to put pressure on
the G7 to agree to a dollar depreciation in its final

The move is being encouraged this weekend by
calls from leading investment banks that the U.S.
needs to restart the long-term greenback
depreciation of the past 2 1/2 years.

In a new report, Binit Patel and Dominic Wilson,
economists at Goldman Sachs, said: "Even taking
into account the approximate 10 percent decline in
the dollar since its peak in early 2002, the dollar
has only gone less than half as far as needed."

Simon Hayley, an economist at Capital Economics,
said: "The main risk for the currency markets is that
the G7 will give in to U.S. pressure and issue a
statement pushing for a weaker dollar. The
September 2003 G7 meeting hinted at this and
sent the euro sharply higher against the dollar."

China is also coming under renewed pressure to
move toward more flexible currency arrangements
and away from its undervalued peg against the
dollar. The renminbi futures markets are pricing in
a 2.7 percent revaluation within one year, less than
before the Dubai G7 meeting last year, but well
above this summer's lows, when change had been
all but ruled out. The trigger for the recent shift in
sentiment is signs that the Chinese authorities are
stepping back from administrative controls,
according to market observers.

"That kind of move would be in China's own
interests, allowing it to deal with local inflationary
pressures through more market-based measures,"
the Goldman Sachs economists said.

The U.S. current account deficit hit a new record in
the second quarter of 2004 and is now larger by an
annualised $129 billion (72.2bn, E105.8bn) than
the total a year ago. It has now reached 5.8 percent
of gross domestic product (GDP). To reduce the
U.S. current account deficit from its current level to
3 percent of GDP, the trade-weighted dollar would
need to drop by nearly 30 percent, Goldman Sachs

But the dollar is little changed from a year ago and
there has been only modest movement in Asian
currencies and none in China.

Gordon Brown, the UK chancellor, will use the
IMF meeting to push his plan for revaluing its gold
reserves as a way of releasing more money to cancel
debts the world's poorest countries owe the World
Bank and IMF.

The Canadian dollar surged against other currencies
on Friday, triggered by new data from Statistics
Canada, which said: "Canada's economic growth
accelerated to 1.1 percent in the second quarter,
making it the only G7 nation to top 1 percent, as
growth in the U.S., Japan, and Europe all slowed."

The statement from the G7 meeting in Dubai a year
ago was one of the most important since the 1980s,
many economists believe. It said that "more
flexibility in exchange rates is desirable in major
countries or economic areas to promote smooth and
widespread adjustment in the financial system, based
on market mechanisms."


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