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Currency markets shrug off G-7's 'advice' on dollar
FOR the second time in three months the finance ministers of the heavyweight economies, the Group of Seven, have taken a collective verbal swing at the dollar. And once again, after a brief look to see whether the United States, Japan, Germany, France, Italy, Britain and Canada really mean business, the currency markets cheerfully resumed buying more greenbacks. After last Sunday's statement from Washington, some observers thought they detected a hardening of language compared with the G-7's first attempt-- in Berlin in February - to put a lid on the dollar. "Excess volatility and significant deviations from fundamentals are undesirable," it said. That was backed by a bilateral meeting between US Treasury Secretary Robert Rubin and Japanese Finance Minister Hiroshi Mitsuzuka at which "they agreed to co-operate in the exchange market when appropriate". And Governor of the Bank of Japan Yasuo Matsushita enigmatically claimed that "the markets will gradually come to understand" the significance of the Washington utterances. The markets, however, decided that without actions such as massive intervention or higher Japanese and German interest rates, the G-7's words amounted to "a green light to buy dollars", as Citibank put it. So the dollar marched on. At midweek its trade-weighted value was 20% up from the lows of April 1995 with gains of 58% against the yen and 26% in Deutschmarks. As market analysts point out, it is precisely because the dollar is driven by "fundamentals" that it remains strong. Preliminary US commerce department figures last week revealed US gross domestic product grew by a whopping real annual rate of 5.6% in the first three months of 1997. It was the fastest spurt for a decade. Taken with the final quarter of 1996, the economy has expanded at more than twice the 2.3% which is officially believed to be the US's sustainable non-inflationary growth. While Wall Street's equity and bond markets took heart from the absence of any inflationary surge, that rate of growth has made it virtually certain that the Federal Reserve will jack up interest rates again when its Open Market Committee meets on May 20. Another 25 basis points hike is on the cards, matching the March 25 move when the Fed funds rate (at which banks lend each other overnight) was lifted to 5.5%. There is hence little reason for markets to sell the dollar down. Japan's domestic economy is expected to falter this year, which would seem to rule out a rise in its interest rates to boost the yen. Meanwhile, Japanese exporters are revelling in the restoration of their profit margins. The same goes for Continental Europe which is still labouring slowly to a recovery. US export growth is already suffering, although the National Association of Manufacturers is forecasting it will be maintained at 6% a year. Cheaper imports, however, are helping the inflation battle in the US. They are providing a safety valve in absorbing a lot of the rise in US consumer spending which might otherwise have resulted in higher prices as capacity was overtaken by demand. If international commodity and oil prices were booming there might be concern about the additional inflationary impact of the strong dollar outside the US. But they are not, and with commodity inputs as low as 15% of average manufacturing costs even that factor would have a limited effect. On balance, the people most worried about the dollar are to be found in the Japanese government which fears the revival of protectionist politics in Washington if Japan's trade surplus with the US starts screaming up again.
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