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Europe and Japan expected to press US at G7 meeting

The US will be pressured by the Europeans and Japanese at the upcoming G7 meeting to get its "twin deficits" under control as part of an effort to stabilize the flagging dollar, analysts say.

The two-day G7 finance ministers meeting opening tomorrow in Boca Raton, Florida, will give leaders a chance to take stock of the global economic situation.

Economists say the Europeans, and to a lesser degree the Japanese, are concerned that their strengthening currencies will dent exports and cut into their fragile economic recoveries, and want a G7 statement to help reverse the dollar's slide.

"Clearly, the dollar is the hot-button issue. Both the Europeans and the Japanese have expressed concerns about the dollar depreciating too rapidly," said Sung Won Sohn, chief economist Wells Fargo Bank.

But Sohn said he thinks these complaints "will fall on deaf ears" in Washington, which despite its "strong dollar" rhetoric is pleased with the lower value of the dollar, which makes US exports more competitive.

"My assumption is that Washington is not all that unhappy with the gradual depreciation of the dollar," he said. "It's good for the US economy, and that's what's called for by economic fundamentals."

These fundamentals, he said, include the "twin deficits" in the federal budget and the current account, a measure of trade and investment.

Jay Bryson, global economist at Wachovia Securities, said he believes the G7 will try to come up with a communique that placates the Japanese and Europeans.

"Many people see a repeat of the message of Dubai, with some adjustments on the margins," Bryson said.

Bryson said one of the key phrases to look for includes a mention of "flexible exchange rates," which seemed to be a signal to Asian nations to refrain from intervention and allow their currencies to rise.

"I don't think they're going to name China or [South] Korea or Singapore, but everybody knows what they're talking about," he said.

But he said Japan and Europe may press for a mention of "excess volatility" that could be a signal to avoid further sharp falls in the dollar.

Bryson said it could be difficult to craft a message to help keep the dollar firm against the European currencies while allowing it to weaken against Asian currencies.

One phrase to look for, he said, would be that the adjustment "needs to be more broadly shared," Bryson said, an implication that Asian nations need to let their currencies appreciate to help correct big global trade imbalances.

The US, still the world's economic powerhouse, is likely to reproach its partners for their sluggish economies, saying the problems will be cured by growth instead of intervention.
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