Saturday, October 20, 2007

Chilling News on the Economic Front

I reprint this article in today's Globe & Mail, since Globe articles quickly disappear behind the subscription wall.

For my thoughts on all this, see the links below.

Help with U.S. dollar sag, Flaherty tells China

October 20, 2007 at 1:12 AM EDT

WASHINGTON — Canada has shouldered more than its fair share of currency appreciation, says Finance Minister Jim Flaherty, and it's up to China to do something about it.

As the Canadian dollar closed well above $1.03, Mr. Flaherty said the currency “has borne the brunt of the U.S. dollar adjustment.”

Officials explained that about one-third of the depreciation of the U.S. currency against a basket of currencies has been absorbed by the Canadian dollar, every year since 2002 – although the figure is likely higher this year.

“A third of the burden has been borne by Canada, and we're only 33 million people in Canada. About a third by Europe,” Mr. Flaherty said after meeting with his counterparts at the bi-annual Group of Seven meeting.

In the past, the Bank of Canada has studiously avoided talk of burden-sharing of currency movements, since it has argued that much of the Canadian dollar's appreciation since 2002 has been warranted by higher commodity prices and strong economic fundamentals.

But Friday, Canada appeared to join Europe in claiming that the appreciation of their currencies was unfair. The euro also traded at an all-time high against the U.S. dollar Friday.

The G7 resisted calls from Europe to bolster the U.S. dollar, and instead wagged their fingers harder than ever at China's exchange-rate regime. They used their toughest language to date in their campaign to persuade China to allow its currency to appreciate.

But the G7 communiqué did not mention the U.S. dollar, the euro or the yuan at all. Markets sent the U.S. dollar lower, interpreting the G7 statement to mean that the only currency solution the seven countries could agree on was that China needs to be more flexible. China was not included in the meeting.

“We welcome China's decision to increase the flexibility of its currency, in view of its rising current-account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate,” the G7 officials said in their final communiqué, meant to set the tone of meetings among international finance officials all weekend in Washington.

China has allowed its currency to appreciate incrementally against the U.S. dollar, but has resisted repeated demands for larger moves, with an eye to fallout within its own economy.

Bank of Canada Governor David Dodge acknowledged that China would not react immediately to the G7 plea, but he held out hope for the future.

“We know that this has to be part of the global adjustment,” he said.

The G7 finance ministers and bank governors also warned that the global economy will slow somewhat, after five years of robust growth.

And they congratulated themselves for handling the global credit crunch well, and said focus on central bankers must now turn to controlling inflation.

Market players involved in the financial turmoil, however, now need to shape up and figure out how not to let such problems boil over again, the ministers said.

“We expect markets to learn lessons and address many of the shortcomings that have been exposed by recent events,” Mr. Flaherty said.

“Our securities regulators should also be engaged on financial markets issues.”

Developing countries, however, blamed lax practices in rich countries. In a communiqué of their own, they noted that so far, the credit crunch has not caused much harm in developing countries.

But they warned that unless rich countries improve their oversight of risky market practices, the market turbulence could destabilize their economies as well.

“Ministers underlined that active policy co-ordination is critical to prevent the emergence of a larger crisis,” the Group of 24 developing countries said in a statement Friday.

See also:
* The Unsustainable World Economy
* A Big Mess is Brewing
* Sub-Prime


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