G-7 must put its own finances in order

When the Group of Seven finance ministers met in Dubai last year, the announcement on the need for currency flexibility was interpreted as meaning Asian currencies were being kept artificially low by governments, particularly on the mainland, with the intent of making their exports cheaper.

The latest G-7 statement, after the groups meeting in Boca Raton, Florida, would seem to indicate that a further slide in the dollar will be tolerated, as long as it is not too abrupt. The wording about "excess volatility and disorderly movements" being undesirable does leave the European Union and Japan with some room for intervention should the situation become too dire.

In Dubai, the U.S, facing growing trade deficits, was calling for redress through exchange rate adjustments. Amid the latest group gathering, the American economy is growing again and the Bush administration, running for re-election, is happy to see continued weakness in the dollar as this boosts exports.

This time, it is the Europeans, with a currency that has risen 30 percent against the U.S. dollar over two years and whose goods are now more expensive in both America and Asia, who are seeking relief. They point to a ballooning U.S. budget deficit that is exacerbating the imbalances, but little is likely to happen on that front for the next year. Some help may come in the form of rising U.S. interest rates, which would make it more attractive to hold U.S. dollar assets.

What does all this mean for the mainland and the rest of Asia? For one thing, there could be renewed calls for Asian currencies to rise, this time to ease the pressure on European economies. As has been widely expected, the statement about currency flexibility was repeated, and will likely be seen as encouragement for Asian countries to let their currencies trade more freely against the U.S. dollar.

Japan, a member of the G-7, has already denied that it is the target of the renewed statement on currency exchange rates. The yen has continued to rise against the dollar despite intervention by Japanese central bankers.

The ultimate aim remains a peg to a basket of foreign currencies. However, domestic financial woes -- including bad loans in the state banking sector -- mean that progress towards the new arrangement and to looser currency controls will be anything but rapid. In the meantime, the best course for G-7 countries would be to put their own fiscal houses in order.

-- South China Morning Post, Hong Kong