G7 eyes market turmoil, exchange rate frictions

FE Team | Published: October 19, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

WASHINGTON, Oct 18 (AFP): The turmoil in financial markets of the past few months and heightened exchange rate tensions will be prominent on the agenda as Group of Seven (G7) financial leaders meet Friday in Washington.
US Treasury Under Secretary David McCormick said the upheaval in markets over the past few months will be part of discussions along with trade, energy, the environment and reform of international financial institutions.
"Clearly the recent financial market turmoil will be a focal point and a good part of the G7 meeting will be devoted to this issue," said McCormick.
The G7 meeting in Washington will include finance ministers and central bank chiefs from the seven leading industrialised nations-the United States, Japan, Germany, France, Britain, Italy and Canada.
McCormick said that Washington sees more analysis of the turmoil is needed before any actions are taken.
Financial markets around the world were shaken in August as investment firms began to write off the value of risky US real estate investments and lenders began to tighten credit.
The fear of credit drying up prompted the US Federal Reserve to cut rates by half a percentage point in September in an effort to get credit flowing and ease some of the stress in the US housing market.
"The issues raised by the recent turmoil are complex and require careful analysis," McCormick said. "We must undertake this work quickly but we cannot rush to judgment."
He added that Treasury Secretary Henry Paulson, along with the G7, asked the Financial Stability Forum at the Bank of International Settlements to form a working group to study the "underlying causes of the turbulence and offer proposals" for ways to avert future crises.
McCormick said Washington did not favor any move that would restrict flows of capital.
"Notwithstanding the recent turmoil, we should remember that the globalisation of capital markets has brought enormous benefits to the world-broader choices in financial products, greater prosperity and expanded opportunity," he said.
The US official said the G7 meeting comes as the global economy "remains quite strong with a robust outlook for the remainder of 2007 and 2008."
He said officials see "somewhat smaller global imbalances, with the notable exception of China, which still has a rising external surplus."
The question of exchange rates, with the dollar near record lows against the euro, is also expected to be part of the talks, according to analysts.
European officials have been worried that the strong euro will crimp exports and eventually economic growth in the 13-nation Eurozone.
G7 officials in recent years have refrained from any direct action to impact currencies, but markers remains cautious.
Paulson has invited wealth fund representatives from China, South Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates to join the discussions.
US officials also plan to propose a "clean technology fund" to finance non-polluting energy projects in the developing world, according to McCormick.
Meanwhile, China will be in the sights of European finance chiefs at a G7 meeting in Washington Friday, worried that Beijing's closely controlled yuan is destabilising global trade flows.
At the same time, the meeting of finance ministers and central bankers from the G7 richest countries is unlikely to offer much relief to those such as France and Italy who fret about the euro's strength, analysts said.
In preparations last week for the Washington meeting, finance ministers from the 13 nations sharing the euro agreed on a statement, singling out the yuan as their prime concern on currency markets.
They want China to allow the yuan to trade more freely amid growing concerns that the rising Asian giant's artificially low exchange rate is driving a flood of cheap imports into Europe.
The ministers agreed to dispatch a delegation of top European finance officials to China to raise their concerns face-to-face with their Chinese counterparts.
Washington has welcomed the tougher European pressure on China, which the US administration has long criticised for not allowing the yuan to appreciate more quickly.