Thursday, December 23, 2004

France turns up the rhetorical heat on the falling dollar.
France's finance minister has said the world faced "economic catastrophe" unless the US worked with Europe and Asia on currency controls.

Herve Gaymard said he would seek action on the issue at the next meeting of G7 countries in February.

Ministers from European and Asian governments have recently called on the US to strengthen the dollar, saying the excessively high value of the euro was starting to hurt their export-driven economies.

"It's absolutely essential that at the meeting of the G7 our American friends understand that we need coordinated management at the world level," said Mr Gaymard.
This week has been the euro's turn to feel the full force of the falling dollar. While the yen has been stable and the pound has fallen nearly 2%, the euro is rocketing skyward, passing $1.35 earlier today.

Data from the last two months suggests that the East Asians are taking a breather from propping up the USD. The Europeans see the writing on the wall -- it's up to them now to pay the price, either by a euro passing the ominous $1.40 line or by a European Central Bank intervening in currency markets.

France wants G7 coordination, but it's not clear to me why the Japanese and especially the Chinese (yes, not a member of the G7, I know) would care to go in on such a deal. The yen is only up around 5% from mid-October while the euro is up nearly 10%. I suspect the Europeans are going to have to bear most of this burden themselves in the near future.

As a side note, I don't think Gaymard is calling for capital controls even though the BBC report says "currency controls". In the AFP report on this, Gaymard urges "une gestion coordonn´┐Że" (a coordinated management) of the dollar/euro/yen/renminbi relationship.

Maybe the hyper-vigilant ECB will actually start cutting interest rates in the eurozone in response? Joachim Fels thinks this will only spur asset bubbles, but since there is so little that is bubbly in the biggest eurozone countries, a little more asset inflation wouldn't be such a bad thing.

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