G7 compromise statement unlikely to stem dollar's slide

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Last updated at: (Beijing Time) Thursday, February 12, 2004

G7 compromise statement unlikely to stem dollar's slide

The US dollar is expected to remain weak in 2004 despite the warning of the Group of Seven (G7)about "excess volatility" in exchange rates, economic analysts here believe.

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The US dollar is expected to remain weak in 2004 despite the warning of the Group of Seven (G7)about "excess volatility" in exchange rates, economic analysts here believe.

The G7 -- comprising the United States, Britain, Canada, France,Germany, Italy and Japan -- met last weekend in Florida, the United States, amid heightened fears that a falling US dollar could imperil improved global growth by hurting European exports and growth.

In a communique widely viewed as a compromise, G7 finance ministers and central bank governors stressed the significance of flexibility in exchange rates while acknowledging "excess volatility and disorderly movements in exchange rates are undesirable for economic growth."

The dollar has plummeted about 30 percent against the euro in the past two years and about 10 percent since the last meeting of G7 finance ministers and central bank governors in Dubai in September.

Compared with the Dubai statement, the new statement reflected more worries over the a dropping dollar. The G7 concluded last September that more flexible currency policies were needed around the world.

Currency traders have interpreted the statement as a green light to allowing a continued fall in the dollar's value although the dollar rose against other currencies on Monday in Asian currency markets. In the following days the euro surged again against the dollar while the sterling hit a new high in 11 years.

Economic analysts say that the depreciation in the dollar is conducive to the US economic recovery and has so far not resulted in any crisis for European and Japanese economies.

Washington has appeared comfortable with the dollar's drop, which has helped boost US exports, reverse the trade deficit, increase the profits of the US companies and eventually stimulate the economic growth.

Although the US economy is on the path to revival, the employment situation is still not good enough for an election year.The Bush Administration is sure to play an economic card in its campaign for reelection and therefore a weak dollar is what GeorgeW. Bush wants.

Meanwhile, the damage caused by a weak dollar to European or Japanese exports is actually not as bad as expected, analysts heresay. Besides, the damage can be offset by the global growth.

A strong euro is not a big impediment to economic growth in theeuro zone, because more than 60 percent of its trade is within thezone, the recent edition of The Economist reported, adding that a surging euro is also helpful in maintaining a low inflation rate in Europe.

Thanks to interventions by the Japanese government, the yen's surge against the dollar has not been as dramatic as other currencies. In fact, the yen dropped against the euro. The financial reports by major Japanese companies showed their profitshave not been affected much by the changes in exchange rates.

Analysts here believe the dollar is likely to continue to fall in 2004 and could slide to 1 to 1.40 against the euro.

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