Exchange rates issues are likely to force themselves on to the agenda of the Group of Seven leading industrialised countries when they meet in Florida in February.
As the dollar continues to plumb new lows against the euro there are increasing concerns that the European currency’s 20% appreciation against the greenback this year could hold back the zone’s economic recovery.
Publicly, policymakers are seeking to shrug off the euro’s rise. Yesterday, for example, Jürgen Stark, vice-president of the Bundesbank, Germany’s central bank, argued that on balance the euro’s appreciation was ”not necessarily negative”.
Concerns that the exchange rate could start to hit Germany’s important manufacturing sector by making exports less competitive are yet to be borne out by the official data.
Figures released yesterday show Germany running a record trade surplus in 2003. Only 10% of German exports go to the US, compared with 50% to eurozone countries.
Privately, there are signs of growing concern. European Central Bank sources have been quoted as suggesting unease at the level of the euro, which climbed above $1,25 on Monday and made further progress yesterday.
Reuters news agency yesterday quoted a G7 source as saying that the issue of the euro/dollar exchange rate would be discussed at February’s meeting.
The source said an exchange rate higher than $1,20 would not be good for the eurozone economy, while $1,30 represented a ”pain barrier”.
The US currency has been hit by concerns about the size of the American trade deficit and the economy’s ability to sustain its rapid growth.
Consumer confidence and home sales data out yesterday, though good, fell well short of high market expectations. With more people warning that jobs were hard to find, the figures underpin worries that the US upturn could yet turn into a jobless recovery.
Although a weaker dollar may help to address the trade imbalance, some analysts argue that US policymakers may also be concerned that the greenback’s travails will lead international investors to sell more dollar-denominated assets.
G7 finance ministers discussed exchange rates at their last meeting — in Dubai in September — but, though the subsequent statement was aimed at encouraging a more flexible approach to currency levels in Asia, in the event it created a degree of confusion among foreign exchange traders.
”There is no doubt that some European politicians and central bankers are concerned about the euro’s strength but I doubt the US will care what the Europeans say. The Germans might want to discuss the euro but it is unlikely the Americans will,” said Julian Jessop, chief European economist at Standard Chartered in London.
One problem for the Europeans is that, with the Chinese currency pegged to the dollar and Japanese policymakers ready to cap the rise in the yen through foreign exchange market intervention, the euro has been left to take the strain from the dollar’s decline. The pound is at an 11-year high against the US currency.
Policymakers are unlikely to act unilaterally to try to stem the euro’s climb against the dollar, preferring support from the US. – Guardian Unlimited Â