G7 forex shift came after heated discussion: report

By Sumeet Desai

WASHINGTON (Reuters) - The Group of Seven's new warning on excessive fluctuations in major currencies was only agreed after long and heated arguments between members of the rich nations club, G7 sources have told Reuters.

After their meeting on Friday, G7 finance ministers and central bankers issued a statement saying they were concerned by the sharp moves in foreign exchange markets in recent weeks -- code for worries that the dollar was falling too fast.

While policy-makers put on a united front at news conferences in Washington after the joint communique was issued, G7 sources say the change in language -- the first major shift in four years -- represented a victory for euro zone delegations.

European policy-makers, and the French in particular, have been worried that the euro's surge to record highs against the dollar is robbing their businesses of competitiveness and have long been demanding the G7 show concern on the dollar's slide.

For the most part, however, the United States, Britain and Canada have preferred to take a laissez-faire approach to currencies, arguing that levels are a matter for markets.

But the wild gyrations in recent weeks at a time when all financial markets are especially volatile because of a global credit crunch was enough to convince policy-makers that some show of concern was needed.

Britain was one of the main obstacles to reaching a quick deal, according to one G7 delegation.

Another source said the common wording was only agreed after two hours of protracted and heated exchanges between the deputies who draft the communique. Usually, the discussion takes about half the time.

France, the source said, led the charge to change the wording. Its policy-makers have been very vocal on the damage the euro's strength is doing to their economy. Germany was also on side while Britain and Canada were initially opposed.

The United States and Japan, however, were convinced by the high degree of volatility in currency markets. "No one likes disorderly movements," said another G7 source.

Asked on Friday what had led the United States to change its mind and back a shift in the communique's language, European Central Bank President Jean-Claude Trichet said he did not want to comment on what were "touchy" negotiations.

Like other policy-makers, he said the statement spoke for itself -- "like a poem."

While some have suggested the United States backed the new language because the Federal Reserve is worried about the weak dollar pushing up its domestic inflation, the first G7 source pointed out the U.S. central bank was not responsible for the communique draft.

Traditionally, only the U.S. Treasury speaks about policy on the dollar.

"It's because of all the volatility," the source said.