G7 finance chiefs to discuss imbalances

Group of Seven finance officials meet this weekend in Istanbul to debate whether to surrender the weapon that helped shape currency markets for three decades.

One week after the G20 anointed itself the world economy's main policy forum, G7 Finance Ministers and central bankers may break with tradition and choose not to release a statement on the global economy and currencies, said officials who declined to be identified.

That would deprive traders of the commentary that policy makers use to influence exchange rates.

The debate over the G7's role comes as European Central Bank President Jean-Claude Trichet and Bank of Canada Governor Mark Carney signal concern about the US dollar's slide over the past seven months and Japan's new Government struggles to find a clear line on the yen.

The diversity of the G20, which includes China and India, means investors may have to deal with conflicting signals as its members seek common ground.

"There may be communication difficulties as policy makers misspeak and inject volatility into markets," said Stephen Jen, a managing director at BlueGold Capital Management in London.

"It will take a few rounds of G7 and G20 meetings to form a collective opinion on currencies."

The euro fell against the dollar after Trichet said "disorderly movements" in exchange rates had "adverse implications" for economies. It has gained 16 per cent since March.

Officials gather today, a week after President Barack Obama and other G20 leaders left Pittsburgh pledging to work together to narrow so-called imbalances such as the US trade deficit and China's current account surplus.

"They clearly believe the G20 will be the appropriate place to discuss currency," said Simon Derrick, chief currency strategist at BNY Mellon.

The embrace of the G20 reflects China's increased role in the global economy and the view that its policy of managing the yuan's value against a basket of currencies means its opinions cannot be ignored.

"Only the G20 can say anything meaningful about currencies because the big policy issue is the dollar-China peg," said Bilal Hafeez, Deutsche Bank's London head of foreign-exchange strategy. China has kept the yuan little changed against the dollar for more than a year.

The biggest industrial nations started to meet regularly in the 1970s after the Bretton Woods currency framework that governed the global economy after World War II collapsed.

Their power to steer currencies reached its pinnacle in the 1980s when five of its members signed the Plaza Accord to weaken the dollar. The Louvre Accord was introduced two years later to buoy it. In September 2000, the G7 rescued the euro - the last time it intervened.

Three years later, in Dubai, it started to lobby China to allow the yuan to appreciate with a call for "more flexibility in exchange rates."

A study last year by ECB economist Marcel Fratzcher found the G7 was successful in moving currencies on 80 per cent of the 29 occasions it tried to do so since 1975 within a year.

"G7 currency statements were not always effective straight away, but there have been times when they have signalled clear preferences," said Thomas Stolper, a currency strategist at Goldman Sachs Group Inc in London.

Now, balancing the world economy will likely weaken the dollar and the sterling, while boosting the euro and yuan, whose economies are export-led, said Marco Annunziata, chief economist at UniCredit Group in London.

That may concern some in the G7 as the dollar's 13 per cent slide against a basket of seven currencies since the start of March impedes their recovery by making exports more expensive.

Carney said on September 28 that the Canadian dollar's gain was a "major risk" and Trichet said the same day that a strong dollar was "extremely important" for the world economy.

Japanese Finance Minister Hirohisa Fujii said on September 29 that the Government might act to stabilise the foreign-exchange market and denied he wanted a stronger yen.

Annunziata said: "There is definitely rising concern about currencies as we're at a delicate moment for economies."

While the dollar's slide may buoy the US economy by easing lopsided flows in trade and investment, World Bank President Robert Zoellick this week became the latest official to question its role as the world's only reserve currency.

Such speculation could undermine the US's ability to draw the foreign finance it needs to fund its US$11.8 trillion debt.

- BLOOMBERG