G7 Summit: What Won't Be Talked About in Boca Raton [EDIT: so convoluted - can you spell gold? see highlight portion]
Feb 04, 2004
stratfor.biz
Summary
No big changes in word or deed on foreign exchange issues should be expected from the coming G7 meeting in Florida. This could prompt Europe to turn its criticism toward Japanese (and Asian) interventions -- a position the United States isn't likely to adopt itself.
Analysis
Although the falling dollar and appreciating yen and euro will dominate the minds of those attending -- and closely watching -- the Feb. 6-7 Group of Seven meeting in Boca Raton, Florida, nothing concrete is likely to result from the meeting in terms of coordinated action. Currency issues are also likely to get short shrift in the final meeting communiqu? failing to give Europe even the verbal support needed to avoid a further, damaging appreciation of the euro.
However, Japanese patience with the falling dollar might be wearing thin, and though Europe and Japan do not appear ready to team up against the United States quite yet, Japan could begin floating some interesting threats to make the United States think twice about how long it can neglect the dollar's decline.
Stratfor has said for months that the United States has no interest in altering the course of the dollar during an election year, and that Europe would not find support for its cause from either Washington or Tokyo at February's G7. Pre-meeting statements this week support that view.
U.S. Treasury Undersecretary John Taylor said Feb. 2 that although currencies will be discussed in Boca Raton, he expects the focus will be on the group's efforts to promote global growth through structural reforms. When pressed on Europe's currency woes, Taylor said, "I'd rather not talk about currencies." Though he might have been speaking only of that particular news conference, the U.S. delegation will carry this same sentiment into the G7 meetings.
In a Feb. 3 testimony to the House Ways and Means Committee, Taylor's boss, Treasury Secretary John Snow, reiterated the Bush administration's mantra that the United States supports both a "strong dollar" as well as exchange values set by "open, competitive markets ... So we encourage flexibility." It was the G7's call in September for "more flexibility" in exchange rates that kicked off a new round of dollar depreciation that has seen the dollar drop 9 percent against a basket of currencies since that meeting. Snow made it plain that the United States is not thinking of changing its tune, or its verbiage.
U.S. diplomatic sources in Europe confirm that the United States will resist any real consideration of currency issues, insisting the dollar is appropriately valued and that concerns should not be overstated. Washington might support a very mild reference to currency issues, but only in the context of the need to cooperate to keep the global economy strong and to appreciate the vital role the U.S. dollar is playing in the global economy.
Europe would like to see the term "flexibility" dropped in the G7's statement in exchange for a reference to the group's support of "stability" or even "reduced volatility." Such a message would help support the European Central Bank's own verbal intervention of mid-January, which has managed to bring the euro down from record highs. But a reading of Washington's priorities and statements suggests such a change will not be in the offing in Florida.
European diplomatic sources say that Germany and France will raise the issue of the U.S. dollar weakness, and that they are likely to be supported by Japan. They anticipate a heated discussion but feel that expectations are low for any major changes by the United States. Also, Berlin at this point wishes to avoid any public quarrels with Washington, so the German delegation has been instructed to soften the debate. Berlin likely will ask Paris to do the same.
As much as Japan would also like to see the dollar reverse course, Japanese leaders seem content not to push the United States too hard. In fact, Tokyo's pre-G7 messages are not that much different than Washington's. Japanese Finance Minister Sadakazu Tanigaki said Feb. 3 that the G7's focus will be on macroeconomic and structural issues, but noted that foreign exchange issues "will not be neglected by the G7" -- mirroring Taylor's own comments.
More important than Japan's words are its actions. Tokyo has continued to intervene strongly to keep the yen above 100 over the past weeks and has no plans to slow down. Usually Tokyo is careful to back away from too much overt intervention in the week leading up to a G7, but not this time. When the dollar took a hit Feb. 3 because of Taylor's comments and the discovery of the toxic agent ricin in a U.S. Senate office building, Japan appeared to jump right in: Following an initial decline against the dollar, the yen bounced back, while the euro continued to rise -- suggesting yet another intervention by the Central Bank of Japan.
This intervention helps explain Tokyo's patience with Washington, which appears to be part of an unstated reciprocal agreement: The United States continues to allow the dollar to slide, and in exchange, turns a blind eye to Japanese interventions. This leaves the brunt of the dollar depreciation on the eurozone, which has not been able to put together a sufficiently unified front either at home or within the rest of the G7 to pressure the United States to change its policy stance.
So long as the United States does not join in the chorus, Japan likely will take Europe's slaps, turn the other cheek and continue down its interventionist path. However, if Washington breaks the implicit deal and joins European criticism of Japanese financial policies, Tokyo might have a trick of its own up its sleeve.
At the end of January, Tanigaki told the Japanese Parliament that Japan might consider bringing its gold reserves more into line with other countries that hold a much higher percentage of their reserves in gold. While the United States, France and Germany hold roughly around half of their reserves in gold, Japan's official gold holdings are about 1.5 percent of total reserves, according to the World Gold Council in London.
Such a move could come in two ways: exchanging large amounts of current dollar holdings for gold in the open market, or by purchasing fewer U.S. treasury bonds in the future and instead buying gold. The first option could send the dollar plunging, hurting almost everybody and not really helping Japan at all. The second option would have a less profound impact on the dollar but threaten the United States in another way: Japan is a primary buyer of U.S. treasury bonds needed to finance the huge U.S. budget and current account deficits, and losing that buyer would make financing more expensive.
The statement and its implication likely served as a pre-G7 reminder to Washington that Japan is an important buyer of U.S. treasury bonds and, as such, has the power to make life very difficult for Washington. For now, however, it shouldn't take much to keep Japan happy -- turn a blind eye, a minimum requirement that Washington has been, and should continue to be, willing to do. |
