G-7 Leaders Chatting on US Dollar

By Amy Kaslow, writer of The Christian Science Monitor | The Christian Science Monitor, April 25, 1995 | Go to article overview

G-7 Leaders Chatting on US Dollar


Amy Kaslow, writer of The Christian Science Monitor, The Christian Science Monitor


THE world's finance ministers and central bank governors often slip into Washington little noticed when they arrive for the spring meeting of the International Monetary Fund and the World Bank.

But this year, with the mighty dollar in steep decline against the Japanese yen and German mark and global financial markets skittish, they could make a considerable splash.

The springboard for their discussion this week is the Mexican peso crisis, which rocked the foreign exchange markets, left many sophisticated investors scratching their heads, and cast a shadow over the North American Free Trade Agreement (NAFTA).

The fallout raises the question: When and how should the Group of Seven (G-7) top industrialized nations work to avert, manage, or remedy such problems?

There's nothing like a souring experience to spur soul-searching, and that's what the G-7 representatives from the United States, Britain, Canada, France, Germany, Italy, and Japan will do as they meet today.

The focus, of course, is on the Clinton administration, which championed NAFTA, mobilized the international community to put together a $20 billion stabilization package for the Mexican economy, and presided over the dollar's turmoil.

The Mexican crisis sparked foreign concern about the Clinton team's "laissez-faire" approach toward managing the dollar. To many, US reluctance to actively shore up the US currency has undermined confidence in America's economic leadership.

The dollar is down 13 percent against the Deutsche mark and 17.5 percent against the yen since 1994, but only down a small percentage on a trade-weighted basis that looks at currencies of all important trading partners, including those of developing countries.

Japanese officials worry that their export volumes will shrink dramatically. German Finance Minister Theo Waigel recently sounded his frustration over Washington's failure to back up its declared support for a strong dollar with action. Some officials charge the Treasury Department with giving way to the Commerce Department, a development they say has meant the promotion of exports over stability of the dollar.

Impatient with the American position, IMF managing director Michel Camdessus is pushing the US Federal Reserve to raise interest rates as a way to stabilize the currency markets.

But to many Fed watchers, that prospect is remote, especially given last week's news that the US economy is slowing more sharply than many forecasters had anticipated. Economists say the possibility of a recession by 1996 is dampening any enthusiasm the central bank may have for a rate hike.

Side-stepping calls for intervention in the currency markets, Lawrence Summers, Treasury undersecretary for international affairs, says there is no better "route to more effective cooperation on macro-economic policies, or to greater stability in financial markets, except through the fundamentals .

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