Posted on 1-1-2004
G7
concern as Europe takes brunt of dollar fall
Exchange rates issues are likely to force themselves on to
the agenda of the Group of Seven leading industrialised countries
when they meet in Florida in February.
As the dollar continues to plumb new lows against the euro there
are increasing concerns that the European currency's 20% appreciation
against the greenback this year could hold back the zone's economic
recovery.
Publicly, policymakers are seeking to shrug off the euro's
rise. Yesterday, for example, Jürgen Stark, vice-president
of the Bundesbank, Germany's central bank, argued that on balance
the euro's appreciation was "not necessarily negative".
Concerns that the exchange rate could start to hit Germany's
important manufacturing sector by making exports less competitive
are yet to be borne out by the official data.
Figures released yesterday show Germany running a record trade
surplus in 2003. Only 10% of German exports go to the US, compared
with 50% to eurozone countries.
Privately, there are signs of growing concern. European Central
Bank sources have been quoted as suggesting unease at the level
of the euro, which climbed above $1.25 on Monday and made further
progress yesterday.
Reuters news agency yesterday quoted a G7 source as saying
that the issue of the euro/dollar exchange rate would be discussed
at February's meeting.
The source said an exchange rate higher than $1.20 would not
be good for the eurozone economy, while $1.30 represented a
"pain barrier".
The US currency has been hit by concerns about the size of
the American trade deficit and the economy's ability to sustain
its rapid growth.
Consumer confidence and home sales data out yesterday, though
good, fell well short of high market expectations. With more
people warning that jobs were hard to find, the figures underpin
worries that the US upturn could yet turn into a jobless recovery.
Although a weaker dollar may help to address the trade imbalance,
some analysts argue that US policymakers may also be concerned
that the greenback's travails will lead international investors
to sell more dollar-denominated assets.
G7 finance ministers discussed exchange rates at their last
meeting - in Dubai in September - but, though the subsequent
statement was aimed at encouraging a more flexible approach
to currency levels in Asia, in the event it created a degree
of confusion among foreign exchange traders.
"There is no doubt that some European politicians and
central bankers are concerned about the euro's strength but
I doubt the US will care what the Europeans say. The Germans
might want to discuss the euro but it is unlikely the Americans
will," said Julian Jessop, chief European economist at
Standard Chartered in London.
One problem for the Europeans is that, with the Chinese currency
pegged to the dollar and Japanese policymakers ready to cap
the rise in the yen through foreign exchange market intervention,
the euro has been left to take the strain from the dollar's
decline. The pound is at an 11-year high against the US currency.
Policymakers are unlikely to act unilaterally to try to stem
the euro's climb against the dollar, preferring support from
the US.
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