Markets on knife-edge as G7 shuns yen intervention

THE GLOBAL financial markets were left on edge by Group of Seven ministers and central bankers at the weekend, uncertain whether this week will bring joint intervention in the currency markets.

A formal communique failed to point to any action to halt the rise in the yen and fall in the dollar, sticking to the formula that the G7 would "monitor developments in exchange markets and co-operate as appropriate."

However, there remained concern that the leading governments could still spring a surprise joint intervention on the markets in the next few days. Lawrence Summers, US Treasury Secretary, said the exchange rate question had been a key focus for discussion at the weekend. Analysts were predicting that, in the absence of any co-ordinated action, the US currency and Wall Street could fall further when markets reopen.

"We could have a sell-off in the dollar," said Kenneth Courtis of Deutsche Bank. "We will see wobbly markets everywhere."

The statement said it was important to achieve a more balanced pattern of growth among leading economies. It took reform of the international monetary system forward by boosting the role of the IMF's Interim Committee, chaired by Gordon Brown. This steering committee, renamed the International Monetary and Financial Committee,will meet twice-yearly,.

The G7 welcomed Japanese reassurances that policies would be directed towards holding down the yen for fear its strength will derail the nascent economic recovery. But there was no sign that the internal dispute between the Bank of Japan and the Ministry of Finance has been resolved. The former has been off-setting the impact of massive sales of yen for dollars in the domestic money markets.

Masaru Hayami, governor of the Bank of Japan, showed no signs of shifting. He said: "The Bank of Japan has provided ample liquidity in the context of the zero interest policy." Some Japanese bankers in Washington supported this view. Toro Hashimoto, Fuji Bank chairman, said co-ordinated G7 intervention would be the only way to tackle the currency overshooting.

Tasuku Takagaki, chairman of the Bank of Tokyo-Mitsubishi, was optimistic the yen would reverse direction anyway now the G7 meeting was out of the way. "Wait until Monday or Tuesday, and I would not be surprised to see the yen around Yen110 [to the dollar]," he predicted.

However, his appeared to be a minority view. Concerns have grown about the vulnerability of Wall Street if the dollar falls and US interest rates rise again next month. Ministers from developing countries also expressed alarm at the prospect of fresh financial volatility.

The G7 agreed to the formation of a new group of ministers, the GX, to bring developing and developed nations together to discuss the international economy. It will meet in Berlin in December, chaired by Paul Martin, the Canadian finance minister.