The G7 Concern

The G7 in their meeting yesterday, raised concern on the dollar's slide and said the global economic slowdown may worsen amid an "entrenched" credit squeeze.

"Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," the G-7's finance ministers and central bankers said in a statement after talks in Washington yesterday.

The officials downgraded their outlook for the world economy from that of two months ago, blaming the U.S. housing recession, credit-market turmoil, commodity prices and inflation pressures. The dollar has lost 8 percent against the euro and 6 percent versus the yen since the G-7 last met in Tokyo in February.

The new language was the first significant change in the G- 7's view of currencies since a February 2004 meeting in Boca Raton, Florida.

And now another bit of news.....The International Monetary Fund this week forecast a 25 percent chance of a global recession this year.

The IMPLICATIONS?? Well for one, the G7 statement itself is enough to strengthen the Dollar by 1 to 2 percent in real terms. On the psychological terms...... don't expect the Euro to break 1.60 that soon. And a similar no to the 100 mark for the Yen. Chances are, the Yen may not be able to be convincing in its march towards 100. The Euro on the other hand, should make up to the 1.60 mark despite the G7 comments, abliet a bit later than the markets were expecting.

The Flip side of the story?? The concern may all be talk and nothing else. The G7 did not move any agenda on the steps to be taken to strengthen the dollar except alleying its concerns and putting in place a timeline of 100 days towards achieving its goal. No concrete proposals nor any concrete policy statements. No willingness. And no visible interest in intervening too.

And why so?? one may ask. For, if the greenback weakens, it makes imports expensive while making exports to other nations cheaper. The net effect should be in propelling the economy up. And for the nations importing from the US, it should be a bonus, importing the same goods at a lower cost. At the same time, a stronger currency is good for a nation when it is trying to fight rising inflation and helps in fighting price hikes (Euro is a great case in point here). Thus the muted concern of the other G7 members.

So where does it lead the world economy?? Nowhere I guess. The U.S. economy it seems is weaker than its counterparts of the G7 and the other members are comfortable for the timebeing in letting it being so for a change. They infact for the first time in decades, are not bothered about the fall of the US. What a twist of fate.....