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Who elected those bankers to run the world?
By Kevin Plumberg
Saturday, April 22, 2006
WASHINGTON -- The overall message that markets will take away from
finance officials from the Group of Seven rich nations who met on
Friday is quite simple: The dollar will decline.
The ominous combination of a widely forecast slowing of the U.S.
economy this year, growing fiscal and trade deficits, and increasing
international pressure on China to allow its currency to strengthen
ultimately puts a spotlight on the dollar's weak underbelly.
"You would have to be blind, deaf, and dumb not to see that as
pointing to a direction for the dollar," said David Gilmore, partner
with FX Analytics in Essex, Connecticut.
In its post-meeting statement, the G7 finance ministers and central
bankers stepped up pressure on China by naming -- twice -- the
world's fourth largest economy as one of the "emerging economies
with large current account surpluses" that needs to allow more
flexibility in its currency.
In fact, in an annex to the statement, which focused on repairing
global imbalances between some countries that run relatively huge
trade deficits and others that have large surpluses, the G7
officials said greater flexibility in China's yuan is needed to
allow "necessary appreciations."
Some analysts viewed such pointed pronouncements as a measure of how
unsustainable the U.S. trade deficit -- which last year widened to
$723 billion, nearly 6 percent of gross domestic product -- has
"What might prompt some dollar fears is that the United States is
closer to admitting the deficits are a big problem," said Naomi
Fink, currency strategist with BNP Paribas in New York.
At $875.1 billion, China's central bank holds the world's largest
foreign currency reserves, partly because Beijing regularly buys
dollars to hold down the value of the yuan.
"This is not a flashing sell signal for the dollar," noted Gilmore,
who called the inclusion of China's name in the G7 communique
an "evolution" of international views that would weigh on the
greenback over time.
Participants in a conference on global imbalances sponsored by the
International Monetary Fund were told the U.S. economy will likely
slow along with the pace of consumer spending and that could
ultimately drag the dollar down.
The dollar hit a seven-month low against a basket of major
currencies this week as financial markets reduced their expectations
that the Federal Reserve will raise interest rates beyond 5 percent,
following softer-than-expected U.S. economic data and comments from
Last year, the dollar halted a three-year decline as the greenback's
interest rate advantage widened over some other currencies because
of the Fed's two-year credit-tightening campaign, which as lifted
overnight rates to 4.75 percent from 1 percent.
But recently the dollar's so-called structural vulnerabilities have
been once again haunted the currency.
On Friday, the dollar tumbled against the euro after the Russian
finance minister questioned the pre-eminent reserve status of the
greenback because of its recent volatility and the sheer size of the
U.S. trade deficit.
"There are some jitters out there that global reserves will move
away from dollars," said BNP's Fink.
In the near term, China's being named in the G7 statement could
knock the dollar lower against the yen.
"It is a strong statement," said Steven Englander, chief North
American foreign exchange strategist with Barclays Capital in New
"The risk is dollar/yen. We are closer to pain levels for investors
who are long dollar/yen," he said. Being long a currency is
essentially a bet that it will appreciate.
Against the yen, the dollar on Friday slipped to 116.52, the lowest
in a month after a draft G7 statement obtained by Reuters named
China as a country where greater currency flexibility is needed.
China closely manages yuan exchange rates.
The yen is often traded as a proxy for the yuan because of the close
economic ties and geographic proximity between Japan and China.
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