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Global finance chiefs worry about dollar direction
Fri Apr 21, 2006 5:22 PM ET
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By Tamawa Kadoya and Mike Dolan

WASHINGTON (Reuters) - Finance chiefs from rich nations on Friday welcomed the idea of a bigger role for the International Monetary Fund a bigger role as a global currency watchdog, according to a draft of the officials' communiqué.

Sources also said late afternoon that Group of Seven participants were considering singling out China as a country that specially needed to move toward a more flexible currency.

The draft, seen by Reuters, indicated G7 finance ministers and central bankers saw several risks to a generally sunny global outlook. These included high oil prices, a threat of protectionist trade policies and concern that global trade imbalances could lead to upheaval.

"Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur," the draft said, though it was unclear if that wording would be included in the final version.

A European source had indicated that global finance chiefs were wrestling with the ways to prevent a tumble in the dollar's value should they fail to find a way to smoothly correct trade imbalances.

At an IMF-sponsored conference ahead of the meeting of G7 finance ministers and central bankers, participants were told they should at least prepare for a situation that could include a dollar fall.

"It's probable we will have a slowdown in the U.S. economy, a cooling of the real estate market, a decline in consumer spending -- and so the dollar could depreciate," a source told Reuters, summarizing views expressed at the morning meeting.

"Countries should be ready for that," the source added.

The G7, comprised of the United States, Britain, Canada, France, Germany, Italy and Japan, began meeting early afternoon and officials were expected to issue a final version of the communiqué at around 6:30 p.m. EDT. (2230 GMT)

Sources said the communiqué, summarizing the four-hour meeting, would not specifically mention the dollar but will say coordinated and gradual currency adjustments are important.

"G7 will ask for more flexibility in Asian foreign exchange rates," the source said. "They would like to have gradual and coordinated developments of foreign exchange markets."

Notwithstanding that IMF forecasts are for a fourth straight year of healthy global growth rate topping 4 percent -- specifically 4.9 percent in 2006 -- the G7 officials saw some troubling signs on the horizon.

OIL SPARKS WORRY

With oil prices topping $75 a barrel on Friday, about 23 percent above levels a year ago, Japanese Finance Minister Sadakazu Tanigaki suggested ahead of the G7 meeting that there was reason to worry about a flare-up in inflation.

"Oil prices have not led to inflationary risks so far, but given that prices have extended their highs, we need to further our discussion," Tanigaki told reporters.

The G7 meeting was taking place on the fringes of semi-annual meetings of the World Bank and the IMF, whose leader Rodrigo Rato was pushing for a larger IMF role as an arbiter of economic policy to try to help unwind dangerous trade imbalances.

G7 officials have been trading blame for years over swelling imbalances in trade and finance, with the United States contending slow-growing Europe and Japan are partly at fault while the others blame America's profligate spending.

"A disorderly unwinding of global imbalances would be very damaging and such an outcome becomes more likely as time passes and imbalances are left unaddressed," Rato said Thursday in one of several strongly worded comments aimed at getting the G7 to admit they need a stronger IMF to move a solution forward.

Reforms up for discussion include closer monitoring of exchange policies in emerging economic powers by the fund.

The IMF proposes to start convening multilateral talks with large blocs within its 184-strong membership to coordinate steps to help reduce trade and investment distortions.

Though that has been the domain of the old-line G7 powers until now, the United States is pressing for a larger IMF role, a mantle Rato appears willing to assume.

"The days when G7 finance ministers could sit in a hotel room and make decisions about exchange rates are gone," Rato said, referring to 1985's Plaza Accord to weaken the dollar.

Tension over the currency issue has been heightened by the inability of the United States or other G7 nations to persuade China to revalue its yuan faster -- a failure underlined by inconclusive talks Thursday between Chinese President Hu Jintao and President George W. Bush.

European sources indicated Friday that some G7 members, like Germany, were reluctant to have the IMF play a major role in foreign exchange guidance.

That might reflect wariness within the G7 that the IMF is merely seeking a justification for itself as demand for its crisis loans falls in a healthy global economy and widening availability of private capital flows.