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Credit crisis to overshadow dollar at G7 meeting

Apr 11, 2008 Market Outlook

Credit crisis overshadows dollar

G7 to meet amid turmoil, tensions

By William L. Watts, MarketWatch

Last Update: 4:17 AM ET Apr 11, 2008

LONDON (MarketWatch) - Forget the falling dollar. Efforts to come up with an
answer to a pernicious and surprisingly persistent credit crisis will be the top
job when finance ministers and central bankers of the Group of Seven industrial
nations gather in Washington Friday.

“The credit crisis is a much more salient issue for policy makers than the U.S.
dollar,” said Marc Chandler, head of currency strategy at Brown Brothers
Harriman.

“Many seem to believe if the former can be fixed the latter will stabilize.”

That hardly means currencies will be off the table.

The dollar, after posting a modest rebound earlier this month, came under renewed
pressure this week, falling to yet another new all-time low against the euro,
with the shared currency rising as high as $1.5911 on Thursday. The dollar also
saw renewed weakness against the Japanese yen.

The weak dollar has raised hackles in Europe and Japan, where officials say it
has undermined their exporters.

But economists say market fundamentals probably aren’t right for the G7 to
attempt coordinated intervention in an effort to end the dollar’s slide. After
all, fears remain of a deepening U.S. downturn. The Federal Reserve is expected
to further cut interest rates, while the European Central Bank has left rates on
hold and isn’t expected to follow through with cuts any time soon amid surging
near-term inflation pressures.

In fact, the ECB may welcome the strong euro for its inflation-damping effects,
some economists say. And U.S. officials, while paying lip service to a “strong
dollar” policy, see the weaker currency as a boon to their own exporters.

“Unfortunately, a turn in the U.S. dollar at this point is not in the best
interest of either parties,” said Kathy Lien, chief strategist at DailyFX.com.
“If the diverging monetary policy directions of the Federal Reserve or the ECB
tell us anything, it is that there isn’t much spirit for cooperation.”

Meanwhile, the Chinese yuan’s appreciation against the dollar takes away some of
the G7’s impetus to criticize China’s foreign-exchange policy, which has been a
feature of recent G7 joint statements.

Volatility

The real rub for officials, however, is volatility in the foreign exchange
markets, which is viewed as a potential weight on economic growth.

“I deplore the excessive volatility of exchange rates. I was concerned by the
recent excessive moves,” ECB President Jean-Claude Trichet said at his monthly
news conference Thursday.

John Hydeskov, senior analyst at Danske Bank, said any attempts at verbal
intervention by G7 officials will likely be aimed at volatility. But, he noted,
turmoil outside the foreign exchange markets will make it difficult to come up
with anything that’s likely to stabilize the markets.

“The volatility characterizing foreign exchange markets at first stemmed from the
credit markets and most recently from the equity markets,” he said, in a research
note. “Foreign exchange markets are not, per se, the source of volatility, and
therefore stability cannot be restored through intervention.”

Of course, the G7 shook its finger at volatility as recently as February, when
its joint communique warned again that “excess volatility and disorderly
movements’ in exchange rates were undesirable for economic growth.

Lien says the most likely scenario is for a G7 statement with few changes in its
commentary on exchange rates. Such an outcome could foster some “mild dollar
weakness,” but would probably leave the meeting as a non-event.

A less-likely scenario would be a statement that specifically refers to dollar
weakness while leaving comments about China’s foreign exchange policy unchanged.
That would be “widely dollar bullish,” Lien said, triggering a top in the
euro/dollar while also rallying the greenback against the yen.

Banker meeting

Meanwhile, a meeting between G7 officials and top banking honchos, rather than
the talks between the finance ministers and central bankers, will also be closely
scrutinized analysts and economists said.

The finance ministers and central bankers are set to meet Friday night with
executives from several major global commercial and investment banks, the
Treasury Department said Thursday. A report by the Japanese news service Nikkei
said expected attendees included top officials from Bank of America Corp. (BAC),
Citigroup Inc. (C), Deutsche Bank AG (DB), J.P. Morgan Chase & Co. (JPM), and
others.

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Tags: Boon, Brown Brothers Harriman, Chief Strategist, Credit Crisis, Dollar Policy, Downturn, Ecb, Finance Ministers, Hackles, Inflation Pressures, Japanese Yen, Lip Service, Market Fundamentals, Policy Directions, Salient Issue, Strong Dollar, Term Inflation, Top Job, Weak Dollar, Yen Dollar