G7 finance ministers met over the week-end to discuss global economic issues. What were they able to conclude? Not much. While there is more agreement that the Chinese Yuan should have an "accelerated appreciation", there were no specific comments on the dollar. The Chinese appreciation story is one of general agreement now that Europeans are seeing the impact of a cheap Yuan. Their trade with China has seen increased imports because of the close tie between the dollar and Yuan. When the dollar declines, Chinese goods get cheaper in terms of euro. This was an American problem before, but it is now a G7 issue.
Let’s look at some of the highlights from the meetings. One of the stronger statements from the meeting was, "We expect market participants to address many of the shortcomings that were exposed by recent events." Or, how about this pronouncement from Treasury secretary Paulson, "I believe a strong dollar is in our nation's interest." We have heard this since the Clinton White House and now the dollar is at all time lows.
Different from those strong comments was the statement from developing countries which are no flexing their current economic growth muscles and fiscal soundness. Said one emerging market finance minister, “Developing countries are a new driving force as well as a stabilizing factor in the world economy." The most important current theme is the power of emerging market countries that have strong balance of payment surpluses and money to invest around the world. These are the countries that now control the fate of the dollar based on their investment practices. If they decide to change their reserve allocations away from the dollar, there will be a sustained dollar decline. Portfolio balances will be the driving theme over the next few months.
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