Friction over weak dollar expected at G-7 meeting

Kevin G. Hall
McClatchy Newspapers
October 16, 2007

WASHINGTON — When the finance ministers of six leading developed nations come to Washington later this week, they’ll bend Treasury Secretary Henry Paulson’s ear about the weak dollar and gripe that it’s hurting their exports.

They won’t find much sympathy.

Paulson will be in no mood to talk up the dollar, which has nose-dived against many leading currencies, because the weak greenback has sent U.S. exports soaring by almost 13 percent year over year through August. And that’s offsetting some of the economic pain from the crumbling U.S. housing sector.

What’s been good for U.S. exporters of airplanes, car parts and farm products hasn’t been so hot for rivals in Canada, Europe and parts of Asia, who now find their goods more expensive on the global market than U.S-made and U.S.-grown goods.

Group of Seven (G-7) ministers from Germany, France, Italy, Great Britain, Canada and Japan are expected to press Paulson on Friday to talk up the dollar in hopes that it will slow the dollar’s slide. The dollar has lost more than 8.1 percent of its value so far this year against the euro, the currency of 12 European Union nations, and that’s on top of last year’s drop of 8.2 percent.

For the first time in three decades, the U.S. and Canadian dollars are virtually on par. For Canadian energy companies and mining giants, whose commodities are priced globally in U.S. dollars, that means they earn less for their products when measured by their own currency. And although Canada’s online pharmacies still offer bargains to American prescription-drug consumers because of differing industry cost structures, dollar parity has hurt them, too.

“It has affected business negatively … the perception has decreased sales, for sure,” said Alan Flowers, a spokesman for Candrugstore.com in Vancouver, British Columbia.

Paulson has said repeatedly that a strong dollar is in the U.S. interest, but financial markets determine the value of freely traded currencies. The U.S. dollar’s value has eroded relative to other currencies because of the U.S. economic slowdown, the Federal Reserve’s recent half-point cut in lending rates and strong economic growth in Europe.

“I think Paulson may have to talk nice, but he won’t be forced to do anything more than that,” said Adam Posen, the deputy director of the Petersen Institute for International Economics, a think tank in Washington.

In fact, behind the scenes, Paulson is likely to tell the Europeans to look east, not west, to resolve their trade problems. European powers did little to help Washington make its case that China’s fixed exchange rate makes its products artificially cheap. Now Europeans are shouldering the brunt of the dollar-euro realignment while China’s exchange rate remains pegged to the dollar, so China doesn’t suffer.

“I think, if anything, he’s going to be sort of smirking and saying, ‘You guys could have gotten on board and helped us pressure the Chinese,’” Posen said. “I think the game is not going to be about coordinating or making any promises, but getting together to confront the Chinese.”

This year’s G-7 meeting in Washington stands out from past gatherings because finance ministers won’t be focused much on the outside world.

“For the first time, much of the agenda and problems come from inside the G-7, rather than outside,” said John Kirton, a lecturer at Canada’s University of Toronto and director of the G8 Research Center there.

Finance ministers will focus on problems in the U.S. credit and mortgage markets, he said, which have spilled across the Atlantic to banks in France and Germany and north to Canada, forcing central bankers to intervene with cash to keep markets functioning properly.

“It may have started in the U.S., but it’s a collective G-7 problem,” Kirton said.