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G8 To Discuss Oil, Imbalances; Talks May Hurt Dollar

01.01.70

TOKYO (Dow Jones)--Group of Eight finance ministers won't touch upon foreign exchange issues in depth when they meet in St. Petersburg for two days from Friday, but expected talks on global imbalances may hurt the dollar next week, analysts say.

The G8 meeting, to be held ahead of the G8 summit in mid-July, will likely focus on crude oil price rises and their impact on the global economy, as well as ways to tackle terrorist financing and the potentially negative economic impact of the spread of avian flu in Asia.

A statement to be issued after the meeting isn't expected to include wording on exchange-rate policy because the ministers won't dwell on the topic with central bank governors absent from the meeting - which will be comprised of finance leaders from the U.S., Japan, France, U.K., Italy, Canada, Germany and Russia.

Still, the finance ministers may carry on discussions, held at the April meeting of Group of Seven finance ministers and central bank heads, on how to tackle global imbalances as part of overall talks on macroeconomic policy. If such talks direct attention toward the huge U.S. current account deficit and the surpluses accumulated by emerging Asian economies, that may hurt already weak sentiment for the dollar, market players say.

"Global imbalances aren't just about emerging Asia because Russia and oil producing nations in the Middle East are also piling up surpluses," said Akifumi Uchida, senior foreign exchange manager at Sumitomo Trust & Banking.

"But if China and emerging Asian nations still pegging their currencies against the dollar become the main target (of the G8 talks on imbalances), the yen may rise somewhat," he said. The yen is frequently used as a proxy to bet on Asian currency strengthening.

In a joint statement issued at the April meeting in Washington, the G7 finance ministers and central bank governors said fixing global imbalances is a "shared responsibility" and called for "greater exchange rate flexibility" in emerging economies with large current account surpluses, especially China.

The wording fueled speculation that the G7 nations are tolerant of a weaker dollar to curb global imbalances, and sent the U.S. unit to an eight-month low of Y108.97 on May 17. The greenback has since bounced back to around Y111.50 but sentiment remains dollar-bearish on lingering jitters over imbalances and uncertainty over the U.S. monetary policy outlook.

G8 May Invite Asian Countries For Breakfast Japanese Finance Minister Sadakazu Tanigaki has said global imbalances would be on the agenda at the G8 talks, but has repeatedly warned that it's inappropriate to resolve imbalances through exchange rate adjustment alone.

"We would be heading in the wrong direction if we rely on foreign exchange adjustment alone" in curbing global imbalances, Tanigaki told reporters on Friday. The G7 nations agree that each economy "needs to tackle its own structural problems," and this overall understanding won't change much at the G8 meeting in St. Petersburg, he said.

The G8 finance ministers may say in their statement that global imbalances and high oil prices are risks to the global economy, but that would be as far as they would get, according to Hiroshi Watanabe, Japanese vice finance minister for international affairs. "We had an annex statement on global imbalances at the G7 meeting (in April), but we definitely won't have that at the G8 meeting," he told reporters last week.

In the previous G8 meeting held in Moscow in February, the finance ministers said in their joint statement that "further progress needs to be made in implementing policies that contribute to the gradual resolution of global imbalances and promote sustainable growth of the global economy."

The G8 meeting in St. Petersburg may also include a breakfast session with other countries, possibly China, on Saturday. While Russia, chair of the G8 talks, hasn't revealed which members it will invite, the session will likely focus on countries whose quotas at the International Monetary Fund are underrepresented compared with their economic strength, according to Watanabe. Such nations include emerging Asian economies like China and South Korea.

Discussions at the breakfast session likely are part of preparations for the IMF annual meeting in Singapore in September, which is expected to debate ad hoc increases in IMF quotas.

Expert opinion

Halter Marek

02.12.06

Halter Marek
Le College de France
Olivier Giscard dEstaing

02.12.06

Olivier Giscard dEstaing
COPAM, France
Mika Ohbayashi

02.12.06

Mika Ohbayashi
Institute for Sustainable Energy Poliy
Bill Pace

02.12.06

Bill Pace
World Federalist Movement - Institute for Global Policy
Peter I. Hajnal

01.12.06

Peter I. Hajnal
Toronto University, G8 Research Group