G-7 Communique Suggests G-7 Not Yet Concerned About Dollar's Decline
But statement contains basis for cooperation if decline becomes disorderly
Written by Tony Crescenzi , CEO BondTalk.com
The G-7 statement appears to indicate that the G-7 does not object much to the recent behavior of the foreign exchange market, but that the G-7 has forged an agreement to cooperate, perhaps via coordinated intervention, in the event that the dollar's decline becomes rapid and disorderly. The G-7 statement also takes another swipe at the foreign exchange policies of both Japan and China, but there is no evidence apparent in either the statement or in the public remarks from these two countries that the G-7’s majority opinion will be acted upon.
The chatter amongst the G-7 attendees appears to be at odds with the G-7 communique in that the chatter implies substantially more progress about combatting the recent dollar decline that the communique lets on. This seems to suggest that the G-7 attendees believe that the statement provides the language necessary to bind the G-7 nations to a coordinated intervention effort if the dollar's decline were to become rapid and disorderly. The emphasis here is on "if," as the G-7 statement gives no indication whatsoever of any objection to the recent behavior of the dollar.
The subtle changes in the G-7’s latest statement are readily apparent when comparing the communiqué from the G-7’s last meeting in September in Dubai to the communiqué released this past weekend following a meeting in Florida.
The September 2003 statement on foreign exchange:
"We reaffirm that exchange rates should reflect economic fundamentals. We continue to monitor exchange markets closely and cooperate as appropriate. In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system, based on market mechanisms"
[What a crock - Based on fundamentals the US$ should be sinking like a rock.]
Latest statement:
“We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate. In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.”
New in the latest statement was the inclusion of the statement regarding "excess volatility and disorderly movements" and on the desire to see more exchange rate flexibility in "economic areas that lack such flexibility." The former appears to reflect an agreement to act against a rapid and disorderly decline in the dollar, but it contains no evidence of an objection to recent movements in the dollar. The reference to “excess volatility and disorderly movements” appears to be the sentence that the G-7 attendees are referring to quite satisfactorily in their on- and off-the-record comments since the conclusion of the meeting. Many of the attendees have said that the latest statement improves upon the Dubai statement, ostensibly because they may have forged an agreement to act if necessary and that the statement now contains the language necessary to bind the G-7 nations to such an action should it become necessary.
[If the assholes did not keep intervening there would be less volatility - Mish]
Finger-Pointing At Japan and China With respect to Japan and China, the G-7’s latest swipe is only slightly more direct than the one dealt in September. Whereas the September statement emphasized that more flexibility was desirable among major countries, the latest statement is slightly more direct in that it emphasizes that the flexibility is desirable in countries that lack it (Japan and China). The new statement will do little to stop the intervention efforts of the Bank of Japan, which has already said as much. This means that Japan will continue to accumulate dollars, putting its intervention-related dollars into U.S. Treasuries.
[Japan will do what Japan feels is best for Japan. Right wrong or indifferent. They are bitching about Japan stabilizing the US$ but threaten to intervene themselves on a plunge - WTF is that? Blatant hypocricy? - Mish]
Given the lack of a strongly worded threat against current levels of speculation against the dollar, the dollar’s downward trend is likely to continue. A reversal of the trend is not likely unless there are policy changes at the world’s central banks. Policy changes that would impact the dollar might include: a rate hike from the Federal Reserve; a rate cut from the European Central Bank; or an easing up of the fixed-rate foreign exchange regime in China.
[Agreed - everyone wants the US to support the $ when the US wants it lower - what a crock - Mish]
The dollar’s decline is a double-edged sword but the impact has been positive thus far in that it has helped to boost profits of U.S. multinational companies and has boosted exports. But a rapid and disorderly decline could have more dire consequences given the size of the U.S. budget and trade deficits. The G-7 recognizes this and that is why the cast a safety net against such a decline by showing their objections to “excess volatility and disorderly movements.”
[Japan intervening has prevented a rapidly falling US$ - Do they or do they not want Japan to intervene and do they or do they not want the US$ to trade on fundamentals? - another crock of horseshit - mish]
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