G7 could pay more attention to FX: Mike Dolan

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LONDON — Japan may seem like a lone voice within the Group of Seven arguing for some monetary calm, but the rest may be paying more attention than it appears.

Almost all other economic and political action these days seems to have gone back to the 1980s – so thoughts of significant G7 intervention in the currency market seem less far-fetched in this context.

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The US dollar index has posted year-over-year gains at the current rate of 20% only four more times since its historic surge in 1985 prompted the then G5 powers to intervene. collectively to cap the creeping greenback.

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These four extreme dollar surges occurred during the European exchange rate crises of the early 1990s; the collapse of the euro in 2002/2001 after the launch of the single currency; the consequences of the 2008 banking crisis; and the oil crash in early 2015.

At least two of those moments involved some form of G7 or G20 action to calm the horses down.

Is there a case for this to happen again?

Reinvigorated as an effective governing council for the world’s major democracies in a time of turbulent geopolitics, the G7 may have other, more pressing battles to fight right now.

The latest virtual meeting of G7 finance ministers this month focused on plans to cap Russian oil prices as another sanction against Moscow for its invasion of Ukraine and as a way to limit the surge in energy costs and the resulting inflation.

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There was no talk of the dollar’s alarming acceleration against the Japanese yen, euro and British pound to its highest levels in decades – or the additional pressure being created on imports of dollar-priced energy in these countries, which in turn worsens both inflation and the economy hit there simultaneously.

Announcing growing yen anxiety in Tokyo since then, Japanese Finance Minister Shunichi Suzuki repeatedly verbally protested excessive currency movements on the sidelines of the meeting, adding that he would coordinate any response with his allies.

Yet no mention of exchange rates found its way into the very unique statement.

Similarly, a broader statement from the G7 leaders’ summit in Germany at the end of June appeared to dismiss monetary issues as a substantive issue, making only a passing reference to longstanding language about the desire to stable exchange rates.

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But as Europe and Japan face dollar energy bills this winter and European central banks hunt at least an increasingly belligerent Federal Reserve to raise interest rates, soaring of the dollar is a dangerous irritant to their ability to navigate what now appears to be energy in its own right. and the economic war with Russia.

And if, as the World Bank reiterated on Wednesday, the risk of a global recession is growing rapidly, then the soaring dollar is an aggravating factor for both Europe and Japan as well as many more fragile developing economies. heavily borrowed in dollars.


Warning of “fallout” from “synchronous” tightening, which it said could mean another two percentage points of interest rate hikes from major central banks, the World Bank study said that the global economy was already in its steepest downturn after a post-recession recovery since 1970.

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If you’re looking for “spillovers,” look no further than the soaring dollar. In the past 12 months alone, it has risen 31% to 24-year highs against the yen, 21% to 37-year highs against the pound and 18% to 20-year highs against the euro.

Since the G7 leaders met in June, the dollar alone has gained another 5-6%.

But the impact has already been felt both in inflation rates and in rapidly deteriorating trade deficits in the eurozone, Japan and Britain.

In what appears to be a world of upheaval for the traditional surplus economies of the aging eurozone and Japan, both recorded an explosion in trade gaps over the summer on Wednesday as energy import prices and the dollar climbed in tandem.

Japan recorded its biggest one-month trade deficit in August, while the euro zone’s external trade balance was in deficit for the 9th month in a row, with the euro deficit in the year to July reaching 177.4 billion euros. euros, against a surplus of 121.3 billion euros in the same period last year.

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While Britain may be familiar with chronic external deficits, the soaring cost of dollar-priced fuel imports has already blown its current account gap to a record share of GDP this year.

The problem for the G7 countries, whose finance ministers and central bankers meet again at the International Monetary Fund’s annual meeting in Washington early next month, is that it’s starting to have a spiraling effect.

Inflated trade gaps exaggerate currency weakness, which in turn amplifies these deficits.

The European Central Bank has already begun to publicly cite a weak euro/dollar as a problem in its fight against inflation and the head of the Bank of England, Andrew Bailey, continually points out the outsized strength of the dollar.

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On Wednesday, ECB Vice-President Luis de Guindos said bluntly: “The depreciation of the euro is also adding to these inflationary pressures.”

So, as the Bank of Japan increases its threats of intervention against the yen, it may start to receive a more sympathetic ear from its allies next month.

While the United States may see the benefits of a higher dollar at the margin, these should pale in the face of the threat of global stress and recession and the need for solidarity in an economic war with Russia.

Echoes of the 1980s resonate.

The opinions expressed here are those of the author, columnist for Reuters.

(By Mike Dolan, Twitter: @reutersMikeD; added painting by Andy Bruce; editing by Andrew Heavens)



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