13 June 2008

As G8 huddles, spotlight falls on greenback

This article is excerpted from the 13 June 2008 edition of “globeandmail.com”.

Group of Eight finance ministers gathered Friday amid growing speculation that they are poised to do something they haven't done in almost eight years: Take on the currency traders.

Foreign exchange markets are buzzing over signs the U.S. government is starting to take the dollar's decline more seriously and hasn't ruled out intervention – a step that would rile foreign exchange markets.

Federal Reserve Board chairman Ben Bernanke said last week that he's keeping a close watch over the dollar out of concern its weakness is stoking inflation.

The comment – repeated this week by one of his lieutenants – was extraordinary because it broke an unwritten rule in Washington that only the Treasury Secretary talks about the currency.

Not to be outdone, Treasury Secretary Henry Paulson said in a TV appearance that he “would never take intervention off the table.” That remark also caused a stir because it broke from his typical response – a carefully worded script emphasizing U.S. support for a “strong dollar” set by investors in open markets. …

The calculation traders are making now is whether Mr. Paulson will use the meeting to rally his counterparts from the world's wealthiest industrial countries to put a charge under the dollar. Some of the economists who advise them are warning the odds are higher than usual. …

Detailed discussions about the global financial system are generally left to the Group of Seven finance ministers and central bank governors, a group that meets three times a year. Central bankers won't be in Osaka.

Still, the increased interest about the possibility of intervention will ensure ministers are asked about currencies when they meet with reporters tomorrow. And the reason many analysts say Mr. Bernanke and Mr. Paulson have heightened their rhetoric around the dollar is the meeting's main topic: soaring oil prices.

Stephen Jen, the London-based head of currency research at investment bank Morgan Stanley, argues that crude's surge to almost $140 (U.S.) a barrel is at least in part because