No G-7 action, no US$ rebound, analysts say
(NEW YORK) Group of Seven officials, who have signalled concern over a sliding US dollar for the first time in 13 years, may have to match talk with action before the currency stages a sustained rebound.
US Treasury Secretary Henry Paulson, European Central Bank (ECB) president Jean-Claude Trichet and G-7 counterparts warned after talks in Washington on Friday that recent ’sharp fluctuations’ in exchange rates risk hurting the global economy.
Sounding the alarm over the weakest dollar since the 1970s may still fail to buoy it so long as the ECB refuses to follow the Federal Reserve in cutting interest rates. Wariness of backing rhetoric with intervention may also limit the new language’s effectiveness.
‘Officials are clearly more concerned about the dollar, but are not yet ready to openly threaten the market because they know they would not be credible with the ECB’s reluctance to lower interest rates,’ said Stephen Jen, head of currency research at Morgan Stanley in London.
ECB council member Yves Mersch said on Saturday that the bank can’t afford to cut interest rates this year with inflation likely to breach its 2 per cent limit in 2009.
The dollar rose to US$1.5725 per euro at 3:09 pm in Tokyo, from US$1.5808 late in New York on Friday. It earlier reached US$1.56 a euro, the strongest level since April 3. The currency traded at 100.92 yen from 100.95.
The G-7 shifted its stance after the dollar’s decline accelerated since the group met in February, slumping 8 per cent to a record low against the euro and 6 per cent versus the yen. Volatility on options for the dollar rose to 14.5 per cent last month, the same as when the group last tried to prop up the US currency in 1995.
The change represented a victory for European governments increasingly concerned that the dollar’s slide threatens their exports. “I hope this concerted wording on currencies will help,” French Finance Minister Christine Lagarde said in an interview with Bloomberg Television.
Mr Paulson may have acquiesced in part because the lower US dollar is pushing up the price of oil, and could pose a danger to foreign investment in US stocks and other assets, said Jim O’Neill, chief economist at Goldman Sachs in London. — Bloomberg
Source : Business Times - 15 Apr 2008
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