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Focus turns to greenback as G7 meet commences

The dollar's dwindling value has been thrown into the limelight ahead of a gathering of powerful Group of Seven finance ministers and central bank chiefs in Washington yesterday.

US Treasury Secretary Henry Paulson continues to voice confidence in a "strong dollar," but the currency's value has declined sharply in the past year and plummeted to fresh record lows against the euro on Thursday.

The dollar's tumble has marked a boon for US exporters, but it has made foreign goods and products more expensive for Americans.

And some analysts are wondering if the official "strong dollar" pronouncements could be undermined in future months if the currency depreciates further.

Finance ministers and central bank heads attending the G7 meeting -- ahead of this weekend's meetings of the IMF and the World Bank -- were expected to discuss exchange rates.

But G7 officials in recent years have refrained from any direct signal to impact currencies.

Concern is growing in European capitals, though, that the strong euro could crimp exports and eventually economic growth in the 13-nation eurozone and unease is also mounting in the US.

US industrial leaders voiced concerns this week over a prolonged weakness in the dollar despite the healthy boost it gives to US exports.

The Manufacturers Alliance/MAPI said in its quarterly outlook on Thursday that the soft dollar is among several risks that present a "daunting challenge" to the global economy.

"In the short term, the dollar's decline generates inflation risks at home and economic growth risks for the economies of key trading partners," MAPI economist Cliff Waldman said.

Paulson has referred to the "strong dollar" a couple of times in recent days in the runup to the G7 meeting, while also stressing that currency values should be set by the marketplace.

James Dorn, a vice president for economic affairs at the Cato Institute think tank in Washington, echoed inflation worries.

"The domestic value of the currency is still pretty strong because we haven't had a lot of inflation. As long as inflation stays low, the dollar's domestic value will stay strong," he said.

The currency's fall has also caught the attention of the US Federal Reserve.

"Inflation risks could be heightened if the dollar were to continue to depreciate significantly," a summary of the central bank's minutes from its Sept. 18 interest-rate policy meeting said.

Inflation pressures in the US could spike if Americans and US companies have to start paying increased costs for imported goods and services.

Dorn said foreign investors are diversifying out of dollars into euros, which he said would add more downward pressure on the dollar, but he said policymakers have few tools at their disposal.

"There's really not much the US government can do. The exchange markets are huge today and the amount of money they could use to intervene on those markets is nothing compared to the flows around the world," he said.
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