Dollar Drop Slows With G-7 Blessing


Traders betting on intervention by the Group of Seven nations to stem the dollar's 7.7 percent decline against the euro this year may be disappointed.

Finance ministers are less concerned about the currency's relative value than the risks from ``sharp fluctuations'' in exchange rates, their April 11 statement shows. Those swings, as measured by JPMorgan Chase & Co.'s index of implied volatility on dollar options, are abating. Finance ministers object to rising volatility because it complicates the assessment of economies, interferes with monetary policy and gives companies little time to adjust by cutting costs.

Deutsche Bank AG and UBS AG, the two biggest currency traders, say the decline in volatility means the likelihood of buying or selling currencies in concert to halt the dollar's slide has diminished even with the greenback at record lows. Before the G-7 meeting in Washington, strategists including Stephen Jen, head of currency research at Morgan Stanley, speculated that the world's richest nations might intervene.

Implied volatility on options for the dollar fell to 11.28 percent after the G-7 meeting on April 11. It was 14.5 percent on March 17, the same level at which the G-7 stepped into the market in 1995 to influence prices.

The dollar was at $1.5846 against the euro by 10:13 a.m. in London, from $1.5817 on April 18. It traded little changed at 103.66 yen.

A stronger euro benefits Europe by helping to temper inflation. Maintaining price stability is ``of paramount importance,'' European Central Bank President Jean-Claude Trichet said in Frankfurt on April 15. Inflation in the 15-nation euro region accelerated to 3.6 percent last month, the fastest in almost 16 years.

ECB policy makers will have to ``tolerate a stronger euro'' or raise interest rates if they want to bring inflation down, said Thomas Mayer, the London-based chief European economist at Deutsche Bank.

A weaker dollar benefits the U.S. by giving a boost to exports, which increased 2 percent to a record $151.4 billion in February, according to the Commerce Department. Google Inc. said April 17 that first-quarter international sales, which jumped 55 percent, would have been $202 million lower without the benefit of a depreciating dollar.

While Treasury Secretary Henry Paulson has said he is a ``very strong'' supporter of a ``strong dollar,'' one of his predecessors, Paul O'Neill, described that policy as ``vacuous'' in a Bloomberg Television interview last week.

Where the U.S. gains from a falling dollar, Europe loses. European exports to the U.S. fell in 2007 for the first time in four years as the U.S. currency's decline made goods from the region more expensive for Americans.

The last time the G-7, which comprises the U.S., Japan, Germany, Britain, France, Italy and Canada, intervened was Sept. 22, 2000. It bought euros after that currency tumbled 27 percent from its 1999 debut. The G-7 last propped up the dollar in 1995, when it sank almost 20 percent in four months against the Japanese yen to a post-World War II low of 79.95 yen.

The dollar has declined 14 percent against the euro and has fallen 12 percent versus the yen in the past 12 months.

 

 


TradingEconomics.com, Bloomberg
4/21/2008 7:04:20 AM