Lagarde, Flaherty Back Dollar as Oil Dominates G-8 (Update1)

By Simon Kennedy and Theophilos Argitis

June 14 (Bloomberg) -- Finance ministers from Europe and Canada signaled a stronger dollar could help combat surging commodity prices as they and counterparts from the world's richest nations gathered for talks in Japan.
``The strengthening of the dollar seems very satisfying to me,'' France's Christine Lagarde said as she arrived in Osaka for a meeting of Group of Eight officials. Canada's Jim Flaherty said in an interview that a strong U.S. currency ``can help on the inflationary side because of the difference it makes with a low U.S. dollar in terms of oil prices.''
The U.S. currency posted its biggest weekly gain since 2005 against the euro on speculation the G-8 officials will signal they favor further increases. Its slide of the past six years has been blamed in part for the jump in the cost of fuel and food, which is topping the agenda at the G-8 talks.
``The oil-currency nexus is so powerful,'' said Stephen Jen, chief currency strategist at Morgan Stanley in London. ``Both are complicating policy making and hurting the global economy.''
The G-8 will warn in its statement that the jump in commodity costs risks weaker growth and faster inflation, according to an official from a G-8 country who spoke on the condition of anonymity. Such an environment complicates policy choices for governments, which will pledge to remain vigilant and take appropriate actions to ensure stability and expansion of the world economy, the official said.
Oil Prices
Oil reached an unprecedented $139.12 a barrel on June 6 and the United Nations estimates food costs soared 51 percent in the past year as rice, other grains and soybeans all set records. Inflation has replaced the credit squeeze as the main economic concern for ministers meeting in Osaka as higher prices erode household budgets, increase production costs, spark protests and spur central banks to raise interest rates.
Most raw materials are priced in the U.S. currency, providing investors with a hedge against its 5 percent fall versus the euro this year. The International Monetary Fund estimates the dollar's 30 percent decline on a trade-weighted basis since 2002 has added $25 to the price of oil.
``You can't discuss the volatility of oil products without discussing the questions linked to exchange rates, even if exchange rates aren't a determined topic of the G-8,'' Lagarde told reporters yesterday.
The G-8 typically omits mention of currencies in its joint statements because central bankers aren't at the meeting. The communique is scheduled to be released about 1 p.m. today.
Fed Language
Investors still speculate that the dollar will be mentioned by ministers at press conferences after U.S. policy makers including Federal Reserve Chairman Ben S. Bernanke this month toughened their language to support it.
The dollar strengthened to $1.5376 per euro, a gain of 2.6 percent this week. It's also set its biggest weekly advance against the yen since December 2004.
``There is a new momentum for supporting the dollar, and comments from the G-8 will be skewed in that direction,'' said Adam Cole, head of global currency strategy at Royal Bank of Canada in London.
Having previously signaled indifference toward the dollar's drop as it encouraged exports, U.S. officials this month sought to prop it up on concern a weaker currency risks fanning inflation by making imports more expensive.
Bernanke `Attentive'
Bernanke said on June 2 that the central bank is ``attentive'' to the currency's value, a day after Treasury Secretary Henry Paulson said he ``very strongly'' favors a ``strong dollar.''
Deputy German Finance Minister Thomas Mirow said in an interview yesterday that European governments are also keen to ensure that the dollar's depreciation isn't ``carried by the euro alone.'' Europeans fear the euro's rise will sap their exports.
Policy makers' worry about the dollar may fail to buoy it. There is little sign governments are willing to intervene to buy dollars for the first time since 1995. European Central Bank officials say they may raise their key interest rate a quarter point to 4.25 percent in July. That would make it more profitable to hold euros than dollars even as the Fed is forecast to leave its main rate at 2 percent this month after cutting it seven times since September.
Limited Influence
The G-8 may fail to temper rising oil prices. Excluding Russia, the group produces less than 20 percent of the world's crude, forcing its governments to lobby the Organization of the Petroleum Exporting Countries to bolster output and press consuming nations to use energy more efficiently. That has proved an unsuccessful approach since it was adopted four years ago, when oil was about $40 a barrel.
``The position that more development, more investment and an increase in supply are needed is becoming universal and is something we support,'' Russian Finance Minister Alexei Kudrin said in Osaka yesterday. ``The question is why does OPEC think current supply is enough?''
Saudi Arabia, the world's top oil exporter, will seek measures to damp crude prices at a meeting it will host for oil producers, consumers and companies this month, Oil Minister Ali al-Naimi said.

To contact the reporter on this story: Simon Kennedy in Osaka, Japan, at skennedy4@bloomberg.net. Theophilos Argitis in Osaka, Japan, at targitis@bloomberg.net.