Posted on: Tuesday, September 23, 2003

G-7 changes course on currency policy

 • Many in Hawai'i cheered by yen's rise
 • Calls for flexible currency rates put damper on stocks

By Simon Kennedy
Bloomberg News

DUBAI, United Arab Emirates — The Group of Seven finance ministers, by signaling they're prepared to let the dollar fall, ended years of silence on exchange rates and sought a fix for global trade imbalances for the first time since 1985.

The ministers from the United States, Japan, Germany, France, Britain, Italy and Canada on Saturday said they would welcome less rigid exchange policies. The language was aimed mainly at Asian countries such as China and Japan that sell their currencies for dollars to keep their export prices low. That helped push the yen to its highest level against the dollar in three years yesterday.

This statement from Dubai drew comparisons to the September 1985 Plaza Accord, which sent the dollar tumbling against the yen for eight months. It also departed from language in use since 1997, when the G-7 simply pledged to "monitor exchange markets closely and cooperate as appropriate" — boilerplate that currency traders had come to dismiss.

"It is a notable statement because, in general, the G-7 has been unable to reach consensus on broad, systemic exchange rate matters," said Edwin Truman, director of international finance at the Federal Reserve's board of governors in Washington during the 1980s. "It's not a direct descendent but a second cousin of the Plaza Accord."

U.S. Treasury Secretary John Snow had sought such commitments going into these talks, the second G-7 meeting he's attended abroad since he came to office in February. Snow is under pressure at home to do something about mounting trade, budget and job deficits.

So far the United States has lost 2.7 million jobs since President Bush became president in January 2001. Bush is trying to rebuild employment and faces re-election next year.

The latest agreement suggested to traders that Japan will scale back its practice of selling yen to help make its exports cheap. The yen traded at 112.15 per dollar at 4:07 p.m. yesterday in New York from 113.99 on Friday, and reached 111.39 in mid-day trading, its strongest since Dec. 13, 2000. The dollar fell to a two-month low against the euro. U.S. Treasury notes and stocks also declined.

Prior to the Plaza Accord forged on Sept. 22, 1985, the dollar soared to new highs against the yen and U.S. manufacturers called for trade protectionism against surging imports from Japan. The yen reached a low of 263 to the dollar in February 1985, compared with a low of about 122 this year.

"We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms," the G-7 statement said.

Translation? Countries such as China and Japan, which regularly sells yen to keep its value from rising against the dollar, ought to do less currency management and more to boost domestic demand. The result, economists say, would be a rising yen and yuan and greater chance of a decline in U.S. trade deficits with countries in Asia.

"You do not have to be a linguistics professor to figure out that G-7 is quite worried about the threat the U.S. current account and budget deficit poses for the world economy and capital markets," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. "A weaker dollar is an essential component, along with budget consolidation and stronger global demand, in the current account adjustment process."

The G-7 addressed the issue now because failing to do so could destabilize the global economy later, officials and economists said. Proponents for flexible exchange rates included International Monetary Fund executive director Horst Koehler and Federal Reserve Chairman Alan Greenspan.

"The arguments that were made both by Koehler from the IMF, as well as from Greenspan, that exchange-rate flexibility was one of the mechanisms that was a tool of adjustment, were quite persuasive," Canadian Finance Minister John Manley said.