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U.S., allies reach compromise on falling dollar

The United States and its allies softened differences Saturday over whether to let the dollar drop under market pressures or support it with government intervention.
/ Source: The Associated Press

The United States and its allies softened differences Saturday over whether to let the dollar fall freely under market pressures or prop it up with government intervention. A joint statement allowed all sides to claim at least partial victory.

The Bush administration won support for retention of language supporting “more flexibility” in exchange markets, a phrase first used by the Group of Seven wealthy countries last September.

The G-7 endorsement of flexibility has been interpreted by currency traders as giving them a green light to push the exchange value of the dollar lower without fear that the United States or other members of the G-7 would try to fight the moves with massive government intervention to brake the dollar’s decline.

The administration is counting on a declining value of the dollar to boost U.S. exports by making them cheaper on foreign markets. Stronger export sales are expected to lift the fortunes of America’s battered manufacturing companies, who have been forced to lay off 2.8 million workers over the past 3½ years.

Compromise language
But to meet complaints of European countries that the dollar’s decline has been too rapid and too severe and is threatening their companies’ export sales, the G-7 inserted a new phrase expressing concerns about “excess volatility and disorderly movements in exchange rates.”

Europe hopes that phrase will serve as a warning that some countries may be willing to intervene in currency markets to fight too large a decline in the dollar’s value in coming months.

The compromise language was included in the final communique issued at the end of two days of contentious talks over the best approach to take to deal with a dollar that has slumped to record lows in recent weeks against the euro, the common currency of 12 European countries.

“We all agreed to it,” Treasury Secretary John Snow told a closing news conference in response to a question about the language involving currencies. “We all found it appropriate.”

The G-7 countries — the United States, Japan, Germany, France, Britain, Canada and Italy — proclaimed that the global economic recovery has “strengthened significantly” in recent months.

Cooperative efforts
The finance officials endorsed continued cooperative efforts to promote sustained global growth and pledged support in efforts to cut the foreign debt burdens of war-torn Iraq and Afghanistan.

The communique also urged Argentina, currently involved in contentious negotiations with its creditors and the International Monetary Fund, to push ahead with the economic reform program endorsed by the IMF and “engage constructively” with the creditors who hold more than $80 billion in loans the country defaulted on in 2001.

Commenting on the compromise language on currencies, British Chancellor of the Exchequer Gordon Brown said, “The agreement is one that is not just unanimous, but one people are very happy with.”

Added German Finance Minister Hans Eichel: “It is important ... that we don’t have abrupt changes because that would be harmful for the growth of all, even if there are short-term advantages.”

Private analysts said the initial reaction of financial markets to the G-7 statement may be confusion given the mixed signals.

“I think the language was varied enough in the communique to satisfy everyone in the G-7,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “The problem is that everyone will interpret it the way they want to.”

David Dodge, head of the Bank of Canada, said markets would be making a mistake to read the new statement as a consensus view on the part of all G-7 members that the dollar has fallen too far, too quickly against the euro.

“All this is is a statement of principle,” Dodge said. “Markets have not been disorderly.”

Eye on China
The phrase on “more flexibility” was clarified in the new statement to cover “major countries or
economic areas that lack such flexibility,” a phrase that the United States intended to cover China, a country that so far has resisted U.S. pressure to stop tying the value of its currency to the dollar.

American manufacturers say this practice has made the Chinese yuan 40 percent undervalued against the dollar, giving Chinese companies a huge competitive advantage.

A small group of demonstrators outside the Florida resort where officials were meeting chanted “Stop Corporate Greed” and held up signs urging “Deep Six the G-7.”

Snow told reporters that he was pleased the G-7 had issued a progress report detailing actions being taken by all countries to boost global economic growth under a U.S.-backed “agenda for growth” initiative.

For the United States, Snow gave credit to a new round of tax cuts that President Bush pushed through Congress last summer, which Snow said had helped put the United States “on a path to sustained economic growth.”

Snow said in his discussions with the other G-7 countries he stressed the administration’s commitment to cutting the deficit in half over the next five years. The administration last Monday issued a new budget that dramatically raised the deficit estimate for this year to a record $521 billion.

On Iraq and Afghanistan, the G-7 countries welcomed the efforts being made to boost economic growth in the two nations and called on all nations to join in reducing the foreign debt burdens of the two nations to give them a better chance at an economic revival.

The finance ministers and central bank presidents of both Iraq and Afghanistan made presentations to the G-7 on Saturday. While no magnitude of debt relief was discussed in the G-7 meetings, Russian Finance Minister Alexei Kudrin said his country was prepared to forgive around 65 percent of the $8 billion of debt Iraq owes Russia not counting interest payments.

Afghan Finance Minister Ashraf Ghani said his country would seek pledges of an additional $28.5 billion in aid and reconstruction financing over the next seven years at a donors’ conference of wealthy nations to be held in Germany in late March.