World Economic

Group of Seven finance chiefs stopped short of singling out the weaker dollar for criticism and stuck to their mantra that “disorderly” swings in currencies threaten economic growth.

“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” G-7 ministers and central bankers said in a statement late yesterday after talks in Istanbul, repeating language they used in April. The officials welcomed China’s “continued commitment” to a more flexible currency, which they said would promote balanced international expansion.

The group met at the end of a week in which policy makers from France to Canada signaled worry that a sliding dollar risks impeding their recoveries from the deepest global recession since World War II. The dollar has dropped 14 percent against a basket of seven currencies since early March.

“Following the escalated rhetoric, investors may have been braced for some escalation in language,” said Sophia Drossos, co-head for global foreign exchange strategy at Morgan Stanley in New York. “Since we didn’t get it, I look for the trend of dollar weakness to reassert itself.”

Officials met in Turkey one week after leaders made the G- 20 the primary forum for international economic policy making. Reflecting that shift in power, German Deputy Finance Minister Joerg Asmussen said yesterday the G-7 will meet more informally and gather just before G-20 summits. Statements will be published on merit, he said.

Strong Dollar

After the talks, French Finance Minister Christine Lagarde confirmed the need for a “strong dollar.” European Central Bank President Jean-Claude Trichet, who echoed that sentiment earlier this week, said the G-7 statement sends a “strong message.” U.S. Treasury Secretary Timothy Geithner told reporters yesterday that “it is very important to the United States that we continue to have a strong dollar.”

A weaker dollar risks hurting economies outside the U.S. by making the exports of companies such as Japan’s Canon Inc. more expensive. At the same time, Geithner finds himself having to defend the dollar’s status as the world’s sole reserve currency.

The dollar, which tumbled about 10 percent against the euro and yen in the past two quarters, advanced this week to its highest level versus the euro in almost a month after policy makers criticised its decline. It traded at $1.4576 per euro and 89.81 yen at the end of trading this week in New York.

Softer Statement

In spite of the complaints, yesterday’s statement was still softer than that released after an April 2008 meeting of the G-7 in Washington. That indicated opposition to a falling dollar by complaining about “sharp fluctuations in major currencies.”

The dollar’s depreciation may still bolster the U.S. economy by increasing demand for its products, while the G-20’s push to narrow global imbalances such as the U.S. trade deficit may mean the currency has further to fall.

“It would be extraordinary if in the next year we didn’t see dollar weakness,” Harvard University professor Niall Ferguson told Bloomberg Television in Istanbul. “There’s going to be downward pressure on the dollar and that’s necessary to help the U cash advance.S. recover.”

Japanese Finance Minister Hirohisa Fujii struck a different tone than his colleagues, indicating he might be prepared to intervene in currency markets. After drawing criticism from investors for signaling he favored an appreciation of the yen when he took office last month, Fujii warned yesterday the government will act to restrain the yen if it shows “excessive moves in a biased direction.”

Lobby

Fujii declined to say if it was currently trading in such a way.

G-7 policy makers continued to lobby the Chinese government to help counter the dollar’s slide by letting the yuan appreciate faster after leaving it unchanged in value against the dollar for more than a year. That message has often gone unheeded and China’s membership of the G-20 now puts it in the main policy-making club.

“We welcome China’s continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the renminbi in effective terms and help promote more balanced growth in China and the world economy,” the G-7 said.

Recovery Signs

While there are “encouraging signs” of a recovery, the world economy remains fragile and labor markets are yet to improve, the G-7 said. U.S. job losses unexpectedly accelerated last month and the unemployment rate reached the highest level since 1983, the U.S. Labor Department reported two days ago.

“There is no room for complacency,” the G-7’s statement said. “We will keep in place our support measures until recovery is assured.”

The G-7 said it would deliver on the promises made by the G-20 to strengthen the financial system by prodding banks to improve the quality and quantity of capital they hold and to develop a framework for balanced international growth.

Speaking at a banking conference in Istanbul yesterday, Deutsche Bank AG Chief Executive Officer Josef Ackermann pushed back against efforts to tighten capital requirements at banks.

“The capital issue is important, but it’s not as important as liquidity and profit,” Ackermann, who chairs the Institute of International Finance, told reporters. Restricting bank dividends or compensation to boost capital could alienate shareholders and drive away employees, he warned.

Blueprint

Some officials rejected Ackermann’s arguments. Financial Stability Board Chairman Mario Draghi, who is helping the G-20 write a new blueprint for the financial industry, said “it is premature at this stage to express concern about an excess of regulation.”

“Insufficient regulation and insufficient capital are much more serious problems than too much regulation,” said Lagarde.

Formed amid the oil price shocks of the 1970s and able to influence currency movements throughout the 1980s, the G-7’s power is waning as that of the G-20 rises. That reflects the realization by rich industrial nations that they now lack the sway to govern the world economy without the assistance of emerging markets such as China after their excesses sparked the turmoil that tipped the globe into recession.

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