FYI | Apr 14 2008
By Greg Peel
Under normal circumstances, no one ever expects anything useful to come from a meeting of G7 finance ministers. Usually it’s just a lot of back-slapping and motherhood statements. Under extraordinary circumstances, no one expects much either, except perhaps some recognition that the circumstances are, indeed, extraordinary. But with the global financial system in crisis and the world reserve currency going down the gurgler this time commentators thought that maybe – just maybe – the ministers might come out with something resembling a plan.
Nup.
However, commentators were just a little excited. Following their regularly scheduled meeting over the weekend, this time in Washington, US Treasury Secretary Henry Paulson, as spokesman, did warn that recent “sharp fluctuations” in exchange rates risk hurting the US dollar. This “new language” was the most significant change to the G7 stance on exchange rates, Bloomberg points out, since February 2004 when the G7 last cautioned against “excessive volatility”.
Altogether now: “Ooooo-ooooh”.
The last time the G7 actually did anything about currencies was back in 2000, when it purchased some euros when the new currency started poorly. The last time it urged a stronger US dollar was in 1995.
The current sticking point is that any solution to a sliding dollar largely centres around the ECB cutting its cash rate from 4%. The Fed has cut its rate from 5.25% to 2.25% since the credit crunch began but in Europe – where the credit crunch has also crippled the financial sector – ECB chairman Jean-Claude Trichet has remained defiant in the face of spiralling inflation. Even the Bank of England has capitulated and begun cutting rates, with governor Mervyn King now emasculated since his initial “let the markets sort it out” stance resulted in the fall of Northern Rock.
While Paulson has tediously repeated his preference for a stronger US dollar, the higher the oil price rises the more a falling dollar becomes of grave concern to Americans. However an American trying to tell a Frenchman what to do is a man putting himself in a dangerous position. One could imagine Trichet coming back with something visceral like:
“I don’t want to talk to you no more, you empty-headed animal food trough wiper! I fa*t in your general direction! Your mother was a hamster, and your father smelt of elderberries!”
Trichet, and others on the ECB board, are determined to contain the problem of Europe’s rising inflation before any thought of a rate cut is considered to save an ailing greenback. It would not be beyond the realms for Trichet to actually put the EU rate up, not down. Both the EU and US have monthly CPI data this week. (Mind you, in the meantime the ECB is backdooring out truckloads of euro liquidity to its haemorrhaging investment banks).
Yet not all Frenchmen share the ECB’s view, including Prime Minister Sarkozy who has reiterated the concerns of European businesses that have seen their exports fall due to an overly strong euro. In relation to the new G7 stance, the French finance minister said “I hope this concerted wording on currencies will help”.
Yes thanks Christine, all our fears have now just melted away.
In relation to the ongoing credit crisis, Fed vice chairman Donald Kohn noted “The market is still adjusting; the turmoil has not yet settled down. It’s still a fragile situation out there,” Bloomberg reports. The G7FMs are concerned currency fluctuations risk hurting the global economy even more. They are hoping their strong new words will go some way to halting the US dollar’s slide.
One Goldman Sachs economist suggested the market will probably try to push the euro to US$1.60 (it’s US$1.576 at present) just to test the G7’s mettle. Then will the ministers actually do anything?
The next meeting is in June.
