Euro 1.70 . Dollar do nothing

Dollar do-nothings

Strong opinions are safest if they cannot be put into action. At their meetings in Washington the Group of Seven finance ministers and the governors of the International Monetary Fund mounted no defence of the dollar – which they might just have the power to arrange – but demanded a faster rise in the Chinese renminbi, over which they have no power at all. It demonstrates the stalemate in the international financial system.

The lack of a statement on the dollar should be no surprise. There may still be some within the US Treasury who think fondly of a strong dollar, but exports – up 12.8 per cent in August compared to the previous year – are the bright spot in the US economy. The trade deficit has fallen a little and unless the dollar starts to plummet US officials will welcome that trend.


Analysis: The anatomy of a crash: What the market upheavals of 1987 say about today - Oct-18Lex: G7 meeting - Oct-19Editorial comment: Risky optimism - Oct-17IMF says dollar ‘overvalued’ - Oct-17IMF sees 4.75% growth next year - Oct-17IMF alert on risk to housing market - Oct-18The Europeans and the small band of nations with currencies that float freely against the dollar are less keen. The euro, and commodity currencies such as the Australian dollar, are bearing the brunt of the dollar’s fall and the erosion of their trade competitiveness.

These are the nations with something to gain from G7 or IMF management of the dollar’s fall, but even if they could agree amongst themselves, it is unlikely they could muster support for the massive, co-ordinated, global intervention that would be needed to hold the dollar up. US interest rates are expected to fall relative to those of other countries and fragile US housing and credit markets mean claims on US consumers and companies have little appeal. In August – admittedly the height of the credit squeeze – there was a $163bn outflow of foreign capital from the US.

The masters of the international financial system, therefore, left the dollar well alone. Instead, the G7 finance ministers chose an easier target, and demanded “accelerated appreciation” of China’s renminbi.

This is a splendid idea. It would speed the resolution of global imbalances. It would help manage China’s domestic economy. But pushing for a higher renminbi is not a policy for the G7 – it is a substitute for one. China is not susceptible to G7 or IMF pressure and has made clear that the renminbi will rise when it is ready. While China has moved faster than some expected the pace is still plodding.

We are left with stalemate and the status quo, with the dollar under pressure, but the euro the only safety valve. That is fine as long as Europe’s economy remains robust. But in an extreme scenario – $1.60 or $1.70 to the euro and stunted European growth – this inaction will be hard to sustain