12 Apr 2008 02:14 GMT G7 Seeks To Stabilize Forex Mkts Amid Ongoing Turmoil
By Tom Barkley and Laurence Norman
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The world's leading economies announced the biggest shift in currency policy in several years Friday as they worked to bolster stability and prevent the financial crisis from taking another turn for the worse.
The Group of Seven leading industrial nations held back from unveiling bold new actions aimed at combating the crisis, though they committed to a range of regulatory changes which could reshape the workings of the financial system in years to come.
In the meantime, however, the G7 gave a clear signal that the slide in the dollar and the surge in the euro was not something they could ignore.
"We reaffirm our shared interest in a strong and stable international financial system. Since our last meeting, there have been at times sharp fluctuations in major currencies and we are concerned about their possible implications for economic and financial stability," the statement said.
The foreign exchange language wasn't a revolution. The group members gave no signs that they were ready to intervene in markets to prevent further dollar weakness. Instead, they promised to "monitor" and, in a stock G7 statement, to "cooperate as appropriate."
The group also kept to its balanced statement on China's yuan, which has appreciated only gradually since being unpegged from the U.S. dollar in 2005. Since September of that year, the G7 has been acknowledging China's decision to allow the yuan to be more flexible, but Friday it repeated its call for the yuan to appreciate more rapidly.
However, Friday represented the first big change in the core currency statement since the February 2004 Boca Raton G7 statement, which warned that "excess volatility and disorderly movements in exchange rates are undesirable for economic growth."
In addition to raising the alert level on volatile currency movements, the G7 also dropped its long-running statement that "exchange rates should reflect fundamentals."
G7 officials downplayed the significance of the shift, saying it mainly reflected the reality that currency markets have become more volatile.
"All I'm going to say about that is, if you never changed a communique language no matter what happened around the world, it would be pretty meaningless," said U.S. Treasury Secretary Henry Paulson. "This communique reflects market developments and changes in the markets."
European officials, who have sounded increasingly alarmed about the record-high rise in the euro to above $1.59 last month, Friday conveyed a matter-of-fact tone about the shift.
European Central Bank President Jean-Claude Trichet declined to expand on the wording in the communique, saying, "It's like a poem: it speaks by itself."
French Finance Minister Christine Lagarde, who has been among the most vociferous about the dangers of a strong euro, said she hoped the "concerted wording will help on currencies." The G7 thought it was necessary to "attract market attention to what happened since the last G7," she said.
Alan Ruskin, chief international strategist at RBS Greenwich in Greenwich, Conn., said the G7 is acknowledging that "any speed-up in dollar weakness might create instability and have implications for the economy and other financial markets."
However, Ruskin said that by reiterating the language about continuing "to monitor exchange rates," the group is giving no signal that it intends to sign up for concerted action to stem dollar declines. As a result, there may not be "a huge amount of fallout" from the statement in currency markets in coming days, he said.
The downbeat G7 communique noted that the world economy remains in a "difficult period" and that the financial market turmoil that was sparked in the U.S. subprime market is "more protracted than we had anticipated."
The statement also endorsed a plan to fix the weaknesses in the financial system that enabled the crisis to spread broadly across asset types and borders.
"Rapid implementation of the (Financial Stability Forum) report will not only enhance the resilience of the global financial system for the longer term, but should help to support confidence and improve the functioning of the markets," the communique said.
The FSF released a report Friday that calls for measures that would strengthen liquidity, risk management, transparency and the oversight of capital, among other things.
The G7 pledged to implement some recommendations by the FSF within 100 days. The communique said financial institutions should fully disclose their risk exposures by the mid-year reporting period in line with the FSF guidelines, strengthen risk-management practices and raise capital as needed. The International Accounting Standards Board should improve accounting and disclosure standards for off-balance-sheet instruments, while the Basel Committee would be asked to issue revised liquidity risk-management guidelines by July, the statement said.
By year-end, the G7 would like to have teams of supervisors set up to monitor major banks, according to the communique. Central banks should review and strengthen as necessary arrangements for dealing with failing banks, it said.
Later Friday, the G7 was meeting with the heads of major financial institutions to discuss what was being done about the financial market problems.
-By Tom Barkley and Laurence Norman, Dow Jones Newswires; 202-862-9275, tom.barkley@dowjones.com
(Maya Jackson-Randall, Andrea Thomas, Natalie Boschat, Ken McCallum, Matthew Cowley, Min Zeng and Michael Crittenden contributed to this story.)
(END) Dow Jones Newswires |
