G7 sticks to currency policy, China doesn't budge

LONDON - The G7 wealthy nations on Saturday predicted solid economic growth and subdued inflation this year while repeating currency declarations that some economists believe could limit the US dollar's decline.

China, invited to Group of Seven talks, came under renewed pressure to ease its currency peg to the dollar but said it had no timetable for action on G7 complaints that it keeps the yuan too low, making life hard for other trading nations.

Stephen Jen, chief currency strategist at Morgan Stanley, said there was nothing surprising in the currency statement published after the meeting, but that some of the ministers' comments showed they wanted the dollar to go no lower.

"I think the dollar is going to have a good period now," Jen said after the Group of Seven meeting ended in London.

Japan intervened massively a year ago to keep the yen from getting too strong versus the dollar and hurting its exports and a hesitant recovery from a decade in the economic doldrums.

But it has so far resisted the temptation to do so again.

US interest rates were rising and what seemed to be a more serious commitment to deficit reduction were dollar-supportive and likely to captivate financial markets more than the deficit worries that drove the dollar to a record low against the euro in December, Jen said.

"People are going to start looking more at rate divergence and on currency politics it seems (US President George W.) Bush and (Treasury Secretary John) Snow sound a little stronger now on the strong dollar policy," Jen said.

Snow did not attend the London meeting of finance ministers and central bank chiefs because of a cold and sent Treasury Under Secretary John Taylor in his place.

The communique carried a paragraph on currencies which was a word-for-word repeat of the formula the G7 produced a year ago in Boca Raton, Florida -- in essence saying they wanted less volatility and more flexibility, the latter as a hint to China.

"This is exactly what the market was expecting, said Ian Stannard, currency strategist at BNP Paribas in London.

"The dollar is likely to see its recent trend continue as the focus of the market is very much on cyclicals which have been providing it with some support," he said.

The dollar's slide accelerated in the last quarter of 2004 when it was hitting five-year lows versus the yen and a record low versus the euro above US$1.36 per euro.

"They did a good job of managing expectations, especially regarding the statement. It's basically a non-event." Daniel Katzive, currency strategist at UBS, said.

Chinese Finance Minister Jin Renqing and Beijing's central bank bosses were invited to talk to G7 ministers.

"We are determined to move towards a flexible exchange rate, but no timetable," Chinese central bank deputy governor Li Ruogu told reporters.

Central bank governor Zhou Xiaochuan, adding that economic growth this year might beat an 8 per cent forecast after 9.5 per cent growth in 2004. That is more than double the US forecast and four times that of the euro zone.

"The comments from China are consistent with what they have been saying," said UBS's Katzive.

"They are moving forward with currency reform but there was not the big move some were expecting. I still think there is the chance of a small move from the Chinese sometime this year."

The theory is that if China eases its peg to the dollar, the currency will rise and take the pressure off others in Asia to keep their currencies down to protect exports competitiveness.

A senior US official sounded an optimistic note on the likelihood of a currency policy change by China after Taylor met the Chinese. "Most pieces are in place and largely ready to go in that direction," the official said.

Italian Economy Minister Domenico Siniscalco said talks with the Chinese had focused on the economy and what references there were to monetary policy were very general and "without brusque questions or precise answers".

- REUTERS