China is under pressure to abandon its rigid currency regime, after finance ministers from the world’s leading economies blamed Beijing’s dollar peg for recent ”excess volatility” in exchange rate markets.
Papering over tensions between the European Union and the United States over the dollar’s sharp decline, ministers warned the markets that disorderly movements in exchange rates would not be tolerated. The heat was shifted on to China with a reference to countries which lack flexibility in their currency markets.
”Excess volatility and disorderly movements in exchange rates are undesirable for economic growth,” the ministers said following their meeting in the Florida seaside resort of Boca Raton.
European policymakers want China and other Asian countries which are intervening in the markets to stop their currencies rising to share the burden of the dollar’s slide.
The carefully worded statement represents a compromise between Europe’s desire to prevent a further rise in the euro and the benign-neglect approach favoured by the Bush administration which has been quietly delighted with the boost to growth delivered by a weaker currency.
China is a convenient scapegoat for the G7, as it is not represented in the group. All the signals from Asia’s powerhouse economy — the world’s sixth largest — suggest that domestic priorities rather than foreign pressure will continue to drive Beijing’s exchange rate policy.
With the economy expanding at a sizzling pace, analysts said Beijing could be considering a renminbi revaluation at some point, but was unlikely to drop its management of the currency until its financial system is capable of handling a floating exchange rate.
Analysts said the G7 comments were designed to reverse some of the impact of the announcement following their last meeting in Dubai in September that they wanted ”more flexibility” in currencies — prompting a dollar sell-off that took its value down 10% against the euro. France’s finance minister, Francis Mer, said the statement corrected the view in the market following Dubai that ministers were indifferent to the euro’s rise.
”The markets seemed to have believed that we all wanted a rise in flexibility and particularly regarding the euro versus the dollar, which was not the thrust of what we were thinking of in Dubai,” he said.
The show of unity from the G7 is likely to provide some respite for the euro when trading starts this morning. With the dollar having fallen by a quarter against the euro over the last year, there is concern in Europe’s capitals that the single currency zone’s recovery could be choked off by a rising currency.
But ministers provided few hints that they were prepared to launch a coordinated strike against speculators should the dollar resume its slide, and the next few months promise to be a battle of nerves as markets test policymakers’ resolve.
Marcel Kasumovich, head of G10 foreign exchange strategy at Merrill Lynch in New York, said markets would continue to push the euro higher but might have to contend with the greater risk that the European Central Bank could intervene unilaterally.
”I think we are much closer to intervention. If the euro were to trade quickly to record highs … I think the probability of intervention from Europe has risen considerably,” Kasumovich said.
Britain’s chancellor Gordon Brown, received a boost over the weekend when the International Monetary Fund became the first international forecaster to endorse his pre-budget projections for growth.
The IMF is predicting that Britain’s economy will expand by 3,1% this year — just within the 3%-3,5% range that the Treasury has pencilled in. – Guardian Unlimited Â