G7 currency shift signals growth and inflation fears



The Group of Seven's surprise expression of unease over the US dollar's rapid fall is unlikely to stem the greenback's slide for long since the US economy has yet to show evidence it has hit bottom.

In a major shift, the G7 nations abandoned long-standing language on currencies in a communique issued after a meeting on Friday, and expressed concern that sharp currency moves could undermine economic and financial stability.

The language carried at least the implied threat that authorities could step in to try to right the markets' wrongs and may make traders a bit more nervous about making one-way bets on currencies.

"On Monday you may have a bit of strengthening, but the short- and long-term trend is still for a weaker dollar," said Nouriel Roubini, an economics professor at New York University.

"The US dollar is hurting growth in Europe, so this is a concerted effort to say they don't like this excessive weakness," he said. "The US is on a path of economic recession, and I don't see any bottoming out of the dollar."

The Group of Seven or G7, as the leading industrial nations are known, issued their strongest statement of concern in more than seven years about sharp currency swings and a weaker US dollar dampening growth in Europe. The G7 has not made such a united effort since 2000, when the group intervened to prop up the euro to avert a global financial crisis.

This time, it's the US dollar and the bursting of the US housing market bubble which are of concern.

"The new G7 language may put a bit more two-way risk into (currency) markets in the near term, as it may challenge the view that US officials have a policy of benign neglect" toward the dollar, Morgan Stanley analyst Sophia Drossos said in a statement.

Since early this year, the euro has strengthened by nearly 10 per cent to hit record peaks above $1.59 this week. Meanwhile, the dollar has sunk as much as 10.8 per cent against the Japanese yen, hitting a 12-1/2 year low last month.

G7 officials focused this weekend on the threats of slowing economic growth and rising inflation, which are becoming greater concerns amid rising oil and energy prices and increased demand for food and products from emerging nations such as China, India and Brazil.

"Inflation is driven in part by the rise in oil and energy and food prices," Roubini said. "A main part of that driver is the growth of emerging markets."

Finance ministers in meetings on Saturday at the International Monetary Fund's steering committee also raised concerns about rising inflationary pressures as US import and export prices reported record increases over the past 12 months.

Prices for agricultural exports and food, feed and beverage exports, for example, have both risen more than 33 per cent over the past year.

"Part of the mounting inflationary pressures is secular in nature and reflects the re-alignments in the global economy as emerging countries play a more important systemic role," said Mohamed El-Erian, co-chief executive of Pacific Investment Management Co., which manages the world's largest bond fund.

"The key question is whether these statements will be followed by meaningful coordinated actions," he said.

The G7 actions come after months of sharp rhetoric from Europe protesting the euro's speedy rise, particularly to record highs against the US dollar.

Analysts on Wall Street said the various proposals are unlikely to have significant impact on trading on Monday or ease the broader financial crisis that has gripped global markets since last year.

"While markets will take note of the G7 statements, it is unlikely that there will be any major reaction," said El-Erian, a former IMF official. "Instead, the focus will remain on the outlook for the US economy and the remaining phase of deleveraging in the financial sector."

Among the G7 report's recommendations are fuller disclosure by banks of their mortgage-backed securities and exposure to structured bonds that led to massive losses and writedowns by financial institutions around the world. (Reuters)