G-7 May Break With Currency Tradition as Status Fades

By Simon Kennedy and Matthew Brown

Oct. 2 (Bloomberg) -- Group of Seven finance officials meet this weekend in Istanbul debating whether to surrender the weapon that helped shape currency markets for three decades.

One week after the Group of 20 anointed itself the world economy’s main policy forum, G-7 finance ministers and central bankers may break with tradition and choose not to release a statement on the global economy and currencies, said officials who declined to be identified. That would deprive traders of the commentary that policy makers frequently use to influence exchange rates.

The debate over the G-7’s role comes as European Central Bank President Jean-Claude Trichet and Bank of Canada Governor Mark Carney signal concern about the U.S. dollar’s slide over the past seven months and Japan’s new government struggles to find a clear line on the yen. The diversity of the G-20, which includes China and India, means investors may have to deal with conflicting signals as its members seek common ground.

“There may be communication difficulties as policy makers misspeak and inject volatility into markets,” said Stephen Jen, a managing director at BlueGold Capital Management LLP in London. “It will take a few rounds of G-7 and G-20 meetings to form a collective opinion on currencies.”

The euro fell against the dollar yesterday after Trichet said “disorderly movements” in exchange rates have “adverse implications” for economies. The euro traded at $1.4533 per dollar at 10:11 a.m. in Istanbul after falling 0.7 percent yesterday. It has gained 16 percent since the start of March.

Narrowing Imbalances

Officials gather tomorrow, one week after President Barack Obama and other G-20 leaders left Pittsburgh pledging to work together to narrow so-called imbalances such as the U.S. trade deficit and China’s current-account surplus.

“They clearly believe the G-20 will be the appropriate place to discuss currency,” said Simon Derrick, chief currency strategist at BNY Mellon Corp.

The embrace of the G-20 reflects China’s increased role in the global economy and the view that its policy of managing the yuan’s value against a basket of currencies means its opinions can’t be ignored.

“Only the G-20 can say anything meaningful about currencies because the big policy issue is the dollar-China peg,” said Bilal Hafeez, Deutsche Bank AG’s London-based head of foreign-exchange strategy. China has kept the yuan little changed against the dollar for more than a year.

Faster Yuan Easing

Canadian Finance Minister Jim Flaherty told reporters in Ottawa yesterday that China should accelerate efforts to ease restrictions on its currency and that exchange rates are “regularly” discussed at G-7 meetings. He wasn’t sure if the group would issue a statement.

The biggest industrial nations first started to meet regularly in the 1970s after the Bretton Woods currency framework that had governed the global economy since World War II collapsed.

Their power to steer currencies reached its pinnacle in the 1980s when five of its members signed the Plaza Accord to weaken the dollar. The Louvre Accord was introduced two years later to buoy it. In September 2000, the G-7 rescued the euro -- the last time it intervened.

Three years later in Dubai, it began to lobby China to allow the yuan to appreciate with a call for “more flexibility in exchange rates.”

Currency Study

A study last year by ECB economist Marcel Fratzcher found the G-7 was successful in moving currencies on 80 percent of the 29 occasions it tried to do so since 1975 within a year.

“G-7 currency statements were not always effective straight away, but there have been times when they have signaled clear preferences,” said Thomas Stolper, a currency strategist at Goldman Sachs Group Inc. in London.

This time, balancing the world economy will likely weaken currencies such as the dollar and sterling, while boosting the euro and yuan, whose economies are export-led, said Marco Annunziata, chief economist at UniCredit Group in London.

That may concern some in the G-7 as the dollar’s 13 percent slide against a basket of seven currencies since the start of March impedes their recovery by making exports more expensive.

Carney said on Sept. 28 that the Canadian dollar’s gain was a “major risk” and Trichet said the same day that a strong dollar is “extremely important” for the world economy.

Japan’s Fujii

Japanese Finance Minister Hirohisa Fujii said on Sept. 29 that the government may act to stabilize the foreign-exchange market and denied that he supported a stronger yen. He reiterated today that he won’t discuss the currency’s gains at the meeting, Kyodo News reported.

“There is definitely rising concern about currencies as we’re at a delicate moment for economies,” Annunziata said.

While the dollar’s slide may buoy the U.S. economy by easing lopsided flows in trade and investment, World Bank President Robert Zoellick this week became the latest official to question its role as the world’s only reserve currency. Such speculation could undermine the U.S.’s ability to draw the foreign finance it needs to fund its $11.8 trillion debt.

U.S. Treasury Secretary Timothy Geithner yesterday repeated that a “strong dollar is very important” to the U.S., while Federal Reserve Chairman Ben S. Bernanke said there’s “no immediate risk” to the currency.

The trend away from the G-7 has been building since it stopped backing up its talk with money, said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. It took almost two years for China to heed the request for more currency flexibility.

“I have a G-7 bias, I was weaned on currency accords,” Gilmore said. “On G-7 weekends now I go fishing.”

To contact the reporters on this story: Simon Kennedy in Istanbul at skennedy4@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net