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Tue, Feb 03, 2004 - Page 12 News List

Dollar expected to dominate G7 meeting


The euro was higher in early trading yesterday, as markets stood by for the G7 meeting this Friday.

Foreign exchange markets were paying close attention to every remark from officials in the seven leading industrialized nations (G7), Haruya Ida, a currencies expert at Thomson Financial, said yesterday.

Political and economic frictions generated by the sliding dollar are expected to dominate an upcoming meeting of G7 finance ministers, but there are as yet few signs the session will lead to their resolution.

The dollar plunged to an all-time low of 1.2898 euros to the dollar early last month but has lately showed some resistance, drawing strength from expressions of concern by central bankers and prospects for a rise in US interest rates.

But economists maintain that the trend is for a weaker dollar, notably as the US administration has displayed little discomfort with the fall in the currency.

Quite the contrary. With a presidential election in November, a change in sentiment in Washington favoring a stronger greenback appears unlikely.

Under such circumstances, the gathering on Friday and Saturday of finance ministers and central bank governors from Britain, Canada, France, Germany, Italy, Japan and the US could easily expose their divergent interests.

The meeting is to take place in Boca Raton, Florida, on the Atlantic coast in the southeastern tip of the US.

In the opinion of some economists, Washington's trade partners last year tacitly approved a weak dollar policy even though it was not to their advantage, since a declining dollar increases the competitiveness of US exports.

But they nonetheless backed a statement at the last G7 finance meeting in Dubai in September calling for more flexibility in exchange rates in the hopes it would spur a recovery in the US that would in turn galvanize momentum elsewhere.

But sentiment changed when the dollar took a nosedive against the euro around the first of the year.

"The Europeans are beginning to take fright from a degree of cooperation from which they see no way out," said analysts at the bank HSBC CCF in a research note.

"The Americans are enjoying a devaluation of the dollar that strengthens their growth while having no troubling consequences -- no inflation, no increase in bond yields, no crisis of confidence in the dollar."

At Boca Raton, the Europeans should present a united front. They agreed late last month on a text in which they say they are "concerned about excessive exchange rate moves," signalling their discontent and anxiety.

The Japanese policy is clear, as articulated recently by Finance Minister Sadakazu Tanigaki: the central bank must intervene against speculative dollar sales and thereby stem the fall of the currency.

But Europe and Japan are likely to have trouble getting their point across to the US, still the world's economic powerhouse and likely to reproach its partners for their sluggishness.

For US financial officials, who have said little about the dollar, the G7 meeting should be above all an occasion to insist that Washington's gaping budget deficit is not unusual from a historical perspective.

Without the support of the US a turnaround in current exchange market trends would be hard to contemplate, according to BNP Paribas analyst Alexandra Estiot.

She said the meeting this weekend should end with a vague statement that covers up differences and has no real impact on the market in the months to come.

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