Finance ministers from the seven biggest industrialized democracies, the G-7, met over the weekend in the southeastern U.S. state of Florida to discuss concerns about the dollar, among other economic topics. In the end, they hammered out a group communique stating that "excess volatility and disorderly movements in exchange rates are undesirable for economic growth."
The wording appeared aimed at appeasing the European Union, which sees the falling dollar -- and the rapidly rising euro -- as a threat to its economic recovery. A tough communique, it was hoped, might support the dollar by convincing traders that the G-7 ministers were determined to prevent the currency's fall.
The G-7 links the U.S., Japan, Germany, France, the U.K., Italy, and Canada. Ministers meet regularly to discuss world economic policies.
The dollar has lost more than 40 percent of its value since the start of 2002. Just in the past few months the dollar has dropped more than 10 percent against the euro. The drop gave this weekend's meeting a sense of urgency.
Britain's Chancellor of the Exchequer (Finance Minister) Gordon Brown yesterday hailed the communique as signifying consensus on economic issues. "I think it is important to recognize that it was an agreement of all people there. And I think it is also important to recognize the context that we are moving forward as an economy that is strengthening. We are concentrating on issues where we can make progress, like trade and reform," Brown said.
But it's unclear how deep that agreement really goes.
Just as Brown was giving his opinion, U.S. Treasury Secretary (Finance Minister) John Snow was saying something different. Instead of reinforcing the G-7's view that excessive volatility was bad, Snow repeated the standard U.S. position that markets -- not central banks -- were the best way to set a currency's value.
"The strong dollar is -- has been -- the policy of the United States for a long time. A strong dollar is in our national interest. But the relative values of currencies are best established in open, competitive currency markets. Nobody can devalue their way to prosperity. Artificial props under the value of a currency don't make it a strong currency. Strong currencies reflect fundamentals, and fundamentals are demand and supplies reflected through the marketplace," Snow said.
Currency traders are trained to look for tiny nuances in finance ministers' words. To them, Snow was not saying the U.S. favors a strong dollar, but rather that the U.S. probably would not intervene on markets to support the currency.
The dollar dropped against the euro in trading today, falling to 1.275 dollars per euro. Reports said traders were still mulling over the communique.
The battle over the dollar masks a bigger disagreement between the U.S. and its trading partners over how best to foster economic recovery.
For the U.S., the weaker dollar makes U.S. exports cheaper and can help stimulate the U.S. manufacturing industries. This is especially attractive for President George W. Bush, given the upcoming presidential election in November.
A weaker dollar also makes it more expensive for U.S. consumers to import goods. This in turn will help reduce the U.S.'s large trade deficit.
Europe -- and much of the rest of the world -- see things differently. In the global market, for example, EU exports are competing for customers with cheaper U.S. exports. Major EU economies like France and Germany are looking to their export industries to lead economic growth.
A weaker dollar, too, weakens U.S. consumer demand for imported goods. The U.S. is the world's single-biggest national economy.
Europeans, in general, would prefer to see stable exchange rates to give their exporters a chance.
The wording of the communique was vague enough to allow all parties to claim victory.
An influential member of the governing council of the European Central Bank, Ernst Welteke, said in an interview today with "Frankfurter Allgemeine Zeitung" that he hoped the communique would "help calm the markets."
But that victory may prove short-lived, some economists say, if the dollar falls too steeply.
They point out that a plunging dollar would inevitably lead to higher U.S. interest rates, as foreign investors would demand more of a return for holding the many thousands of millions of dollars of U.S. government debt.
Higher interest rates, in turn, would lead to higher borrowing costs for businesses and slower economic growth.