Unconcerned G7 leaves the sliding dollar at the mercy of the markets

The dollar is set to come under further selling pressure on currency markets today after the Group of Seven (G7) leading economies appeared unconcerned during weekend talks in Washington over its plunge to record lows.

On Friday, the dollar tumbled against a basket of international currencies, with its latest steep losses driving the euro to record highs above $1.43, amid fears of a severe downturn in the American economy and expectations of further cuts in US interest rates.

Despite widely reported pressure from some eurozone governments, led by France, for the meeting of G7 finance ministers and central bank chiefs to put a floor under the US currency, the group’s concluding statement made no reference to the dollar, euro or yen.

Instead, the G7 repeated past warnings that excess volatility in currencies was undesirable. The Times understands that there was little discussion of currency policy at the talks.

The absence of any attempt to shore up the dollar, which has fallen by 8 per cent this year after matching losses on its trade-weighted index in 2006, will be taken by markets today as a “green light” to push it still lower, currency strategists and economists said.

Today’s likely market reaction was foreshadowed on Friday as drafts of the G7’s position that were leaked before US markets closed sent the dollar plummeting on foreign exchanges.

Henry Paulson, the US Treasury Secretary, insisted after the meeting that he had declared his desire to the G7 for a strong dollar. “I was very clear . . . that I believe a strong dollar is in our nation’s interest,” he said.

Most analysts and traders believe that Washington is secretly content with a weaker dollar because it bolsters flagging American growth by boosting exports and so helps to reduce the US current account deficit. Strategists and currency experts predicted that a new dollar sell-off could lead the euro to hit $1.45 within a month, if not sooner.

Leo Melamed, former chairman of the Chicago Mercantile Exchange, said: “It is laughable to say we have a strong dollar policy. I think we have an ‘ignore-the-dollar’ policy.”

Sophia Drossos, of Morgan Stanley, said: “The lack of an explicit warning about dollar weakness [from the G7] may only serve to reinforce the dollar’s slide.”

Pressure on the dollar is likely to increase this week after the International Monetary Fund said that it remains overvalued, while the euro is close to fair levels, based on economic fundamentals. Rodrigo de Rato, the IMF’s outgoing managing director, said yesterday: “In the medium term, the dollar is overvalued. The markets are also betting right now that the dollar is overvalued.”

Mr de Rato’s comments reflect an extended role for the IMF, granted this year, to monitor exchange rates more closely and to flag up currency misalignment.

The fund’s candour has riled some eurozone officials, who fear that the US currency’s pushing the euro upwards will hit exports and damage growth. One official said: “This is unhelpful. This is not the right time to come up with this sort of thing.”

Christine Lagarde, the French Finance Minister, hoped that markets would heed Mr Paulson’s support for a strong dollar. “I hope the financial markets hear this,” she said.

With eurozone irritation growing at the euro’s bearing most of the impact of the dollar’s slide, thanks to many Asian nations pegging their currencies to the dollar through market intervention, the G7 stepped up pressure on China to allow the yuan to rise more swiftly and steeply.

In the first significant shift in its stance on foreign exchange since April last year, the G7 emphasised China’s need “to allow an accelerated appreciation of its effective exchange rate”. Yet there was little sign that Beijing was ready to allow a more rapid rise in the yuan, which floats in a tightly fixed range against the dollar and other currencies. Wu Xiaoling, deputy governor of the Chinese central bank, said: “Moving the exchange rates in the absence of economic restructuring policies will hurt China.”