G7 currency shift signals growth fears

By Walden Siew - Analysis

NEW YORK (Reuters) - The Group of Seven's surprise expression of unease over the U.S. dollar's rapid fall is unlikely to stem the greenback's slide for long since the U.S. economy has yet to show evidence it has hit bottom.

In a major shift, the G7 nations abandoned long-standing language on currencies in a communique issued after a meeting on Friday, and expressed concern that sharp currency moves could undermine economic and financial stability.

The language carried at least the implied threat that authorities could step in to try to right the markets' wrongs and may make traders a bit more nervous about making one-way bets on currencies.

"On Monday you may have a bit of strengthening, but the short- and long-term trend is still for a weaker dollar," said Nouriel Roubini, an economics professor at New York University.

"The U.S. dollar is hurting growth in Europe, so this is a concerted effort to say they don't like this excessive weakness," he said. "The U.S. is on a path of economic recession, and I don't see any bottoming out of the dollar."

The Group of Seven or G7, as the leading industrial nations are known, issued their strongest statement of concern in more than seven years about sharp currency swings and a weaker U.S. dollar dampening growth in Europe. The G7 has not made such a united effort since 2000, when the group intervened to prop up the euro to avert a global financial crisis.

This time, it's the U.S. dollar and the bursting of the U.S. housing market bubble which are of concern.

"The new G7 language may put a bit more two-way risk into (currency) markets in the near term, as it may challenge the view that U.S. officials have a policy of benign neglect" toward the dollar, Morgan Stanley analyst Sophia Drossos said in a statement.

Since early this year, the euro has strengthened by nearly 10 percent to hit record peaks above $1.59 this week. Meanwhile, the dollar has sunk as much as 10.8 percent against the Japanese yen, hitting a 12-1/2 year low last month.

G7 officials focused this weekend on the threats of slowing economic growth and rising inflation, which are becoming greater concerns amid rising oil and energy prices and increased demand for food and products from emerging nations such as China, India and Brazil.

"Inflation is driven in part by the rise in oil and energy and food prices," Roubini said. "A main part of that driver is the growth of emerging markets."

Finance ministers in meetings on Saturday at the International Monetary Fund's steering committee also raised concerns about rising inflationary pressures as U.S. import and export prices reported record increases over the past 12 months.

Prices for agricultural exports and food, feed and beverage exports, for example, have both risen more than 33 percent over the past year.

"Part of the mounting inflationary pressures is secular in nature and reflects the re-alignments in the global economy as emerging countries play a more important systemic role," said Mohamed El-Erian, co-chief executive of Pacific Investment Management Co., which manages the world's largest bond fund.

"The key question is whether these statements will be followed by meaningful coordinated actions," he said.