Friday, Sep 19, 2003
The Group of Seven meeting this weekend in Dubai has been touted by some currency strategists as a possible "mini Plaza Accord" and speculation this week over the outcome of the meeting has pushed the yen to its highest in more than two years against the dollar.
The Plaza accord refers to the agreement made 18 years ago this month in the Plaza hotel, New York, among the central banks of France, Germany, Japan, the US, and the UK to weaken the dollar. Over the next two years, the greenback lost more than a third of its value.
This time, the onus is on Asian nations to share in the dollar's decline. Asian central banks intervene frequently in the market to stop their currencies' appreciation from hitting exports. US manufacturers have put increasing pressure on the government to take action on what they see as unfair currency manipulation.
China operates a currency peg that by most estimates, leaves the renminbi at least 20 per cent undervalued, while Japan has spent at least Y9,000bn ($75bn) this year on intervention. Elsewhere in the region, South Korea and Taiwan regularly act to smooth their currencies' appreciation against the dollar while the Singapore authorities also operate a "managed" float.
Currency interventions
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European pressure on Asia is growing too. The dollar's fall earlier this year sent the euro rocketing to a lifetime high and the unexpected speed of the move severely squeezed exporters' margins and weakened the eurozone economy.
The problems caused by the dollar's weakness have been made worse for Europe and other countries with free-floating currencies because Asian intervention has forced the burden of the US weakness onto them. At its peak in June, the euro had risen 12 per cent since January while the yen's gains were non-existent.
Last weekend, Wim Duisenberg, president of the European Central Bank, accepted dollar decline as an inevitable result of reducing the US's record current account deficit, and said this weekend's meeting would discuss a fairer way of sharing the burden.
This week, a leaked document reputed to be a draft of the communique to be issued by the group tomorrow, supported expectations that some shift in policy would be reached. The leaked statement said the group planned to "strengthen the dialogue" between economic areas to "promote a smooth adjustment of international imbalances."
"Assuming that the leak is accurate, [this] would be as close as the US may ever get to saying they have abandoned the idea that a strong dollar is in the US economy's interest, and indirectly this says that the rest of the G7 will accept a weaker dollar," said Michael Metcalfe, strategist at State Street Bank.
The yen this week bore most of the strain as speculation that Japan would refrain from intervening ahead of the meeting helped yen bulls weaken the dollar to Y113.58, a level not seen since January 2001, from Y117.5 last Monday.
The pace of the yen's rise, and the absence of overt intervention by the Bank of Japan prompted some suggestions that Tokyo was signalling a shift in policy and that a new Plaza accord would indeed be reached. Cynics however argued that the lack of heavy intervention was merely a ruse to head off criticism at the meeting.
The same strategists warned that those expecting a new Plaza accord agreement from this weekend were hoping for too much.
"While the prevailing conditions might be quite similar [to those in 1985], not to mention the eventual outcome - ie dollar weakness - it is unlikely the G7 will agree on a [similar] communique," said Alex Schuman, strategist at Commonwealth Bank of Australia.
Tony Norfield, head of FX strategy at ABN Amro, agreed. "This is a dollar versus Asia problem, and there's no real basis for international cooperation," he said. He warned that the fall in dollar-yen could be a trap by the Bank of Japan to lull speculators into taking on even longer yen positions in the hope of catching them off-guard in a massive wave of yen selling.
Jennifer Hughes
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