Magazine article Insight on the News

Consensus Reached in Currency War?

Magazine article Insight on the News

Consensus Reached in Currency War?

Article excerpt

Byline: Jamie Dettmer, INSIGHT

Consensus Reached In Currency War?

The weekend summit of finance ministers from the G7 leading economies ended in mid-February with an agreement to try to curb the slump in the value of the dollar against the euro. Participants at the 24-hour gathering at the Florida beach resort of Boca Raton also decided that Asian countries such as South Korea, Japan, Taiwan and China must share the burden of dollar fluctuations by refraining from intervening in the markets to keep their currencies from rising. The European press was delighted with the summit-ending communique, claiming it represented a victory for the Europeans, who have been pressing the Bush administration to condemn "excess volatility" on the global money markets and to hint at its readiness to intervene to stop abrupt currency movements.

The communique read: "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate." Jean-Claude Trichet, president of the European Central Bank, who last month lamented the "brutal" export-imperiling surge in the euro, hailed it as a "very good communique." He said there was "consensus" among the G7 about the currency fluctuations.

But it is less than clear there really is a consensus. The Bush administration continues to pay lip service to the idea that it is good for the United States to have a strong dollar, but in recent months it has been quite happy to see the dollar weakening in the short term a weaker dollar helps U.S. exporters.

At Boca Raton, U.S. Treasury Secretary John Snow continued with the line that a "strong dollar is in our national interest," but he added remarks that indicate Washington has little interest in joining other G7 countries in intervening in the currency markets. "The value of currencies is best established in open and competitive currency markets," he said. "Nobody can devalue their way to prosperity. An official prop under a currency doesn't make it a strong currency." Nonetheless, according to the Europeans, the Boca Raton summit will put a floor under the dollar's fall. But will it work? As likely, currency speculators will seek to test the resolve of the G7 and to discover whether there is any real political will for the leading economies to act in concert to try to curb currency fluctuations and to strengthen the dollar.

"Europe won the battle of Boca, but the currency war is far from over," cautioned Mark Cliffe, head of economics at ING Financial Markets.

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