G7 intends to underpin the dollar

DIANE COYLE

Washington

Currency markets were sent a clear signal yesterday of the intention of the leading industrialised nations to underpin the dollar.

At the meeting of the Group of Seven industrial countries in Washington, finance ministers welcomed the recent result of intervention by central banks, which reversed the dollar's dramatic tumble against the yen in the early months of this year. The ministers also stressed the need to cut government deficits for the sake of financial market stability.

The meeting of finance ministers and central bank governors from the world's most powerful economies also discussed the economic reconstruction of Bosnia if the peace plans progress. World Bank officials have held their first meeting to draw up reconstruction proposals.

The G7 countries want the International Monetary Fund and World Bank to take the lead in the reconstruction process, building on their experience in Rwanda, Haiti, Cambodia and elsewhere. This weekend's meeting did not reach any conclusions about how much aid would be needed, but ministers said the burden should be shared between Europe, the US, Japan and Muslim countries.

The communique highlighted the G7's commitment to preventing the dollar from falling against the yen again. It welcomed the "orderly reversal" in movements of major currencies that had taken place since their April meeting.

The US currency touched an all-time low of Yen 79.85 to the dollar at the end of April. It has since regained most of the lost ground, thanks mainly to co-ordinated intervention by the US, Japanese and German central banks in mid-August.

This weekend's communique said the G7 ministers "would welcome a continuation of these trends consistent with underlying economic fundamentals". They reaffirmed their commitment to reduce imbalances and to co-operate closely in exchange markets.

During the past three weeks there have been renewed squalls in the currency markets, kept in check only by traders' fear of further central bank intervention. The US currency remains well above its low point but has been unable so far to stay above the psychologically important level of Yen100 to the dollar.

The ministers welcomed America's progress in moving towards cutting its government budget deficit and the Japanese government's moves to revive the flagging economy.

Last week the International Monetary Fund warned that there was a strong risk of more financial market instability if governments - in Europe as well as the US - did not make good progress on cutting budget deficits.

Kenneth Clarke, Chancellor of the Exchequer, said yesterday: "As far as the UK is concerned we are making good progress on deficit reduction and are not open to any criticism on that front."

However, he did hold out hope of tax cuts in next month's Budget. "There will be room for tax cuts, but only if we have public spending under control," he said.

The Chancellor repeated his commitment to bring the government budget into balance over the medium term. The decision on this year's Budget would depend on his judgement about how high public sector borrowing would turn out to be this financial year, but he said marginal rates of tax would be cut as and when this could be afforded.

Last week the IMF said it did not think the UK had any room for tax cuts not matched by reductions in expenditure.