G7 chiefs condemn ‘excess volatility’

FINANCE chiefs from the world’s leading industrialised nations have agreed that a global recovery is gaining steam and papered over tensions on currency exchange rates by warning markets “excess volatility” should not to be tolerated.

As finance ministers and central bankers from the Group of Seven (G7) wrapped up a two-day summit in Florida at the weekend, they sought to calm currency markets and reassure Europeans worried that the rising euro could hurt growth.

“Excess volatility and disorderly movements in exchange rates are undesirable for economic growth,” said a statement on Saturday. “We continue to monitor exchange markets closely and cooperate asappropriate.”

The G7 statement was a calculated effort to counter the impact of their announcement in Dubai last September urging “more flexibility” in currencies. This prompted a dollar sell-off that took its value down 10% against the euro.

But analysts said while the statement may give pause to markets in the short term, it will not change a longer term downward trend for the dollar stemming in part from record US budget deficits.

“I think we are much closer to intervention,” said Marcel Kasumovich, a foreign-exchange strategist with Merrill Lynch , referring to the possibility that a continued appreciation in the euro’s value could lead Europe to counter it by selling the currency and buying dollars.

US Treasury Secretary John Snow made clear this was not something the Bush administration wanted to see . “A strong dollar is in our national interest. But the relative values of currencies are best established in open competitive currency markets. Nobody can devalue their way to prosperity.”

The G7 statement went a step further, saying there should be “more flexibility in exchange rates for major countries or economic areas that lack such flexibility,” in an apparent reference to Asian countries that peg their currencies to others or intervene regularly to affect values.