The US and Europe now have a united desire to see the dollar strengthen against the euro, senior US and European officials have told the Financial Times.
Policymakers have welcomed the recent rebound in the dollar, which at one point yesterday rallied to a six-week high against the euro. They are concerned that the currency markets have been paying too much attention to short-term economic weakness and market stress in the US, and not enough to the medium-term prospects for the US and Europe, a senior US official said.
His comments confirm accounts by senior eurozone officials, who have told the Financial Times the dollar-euro rate had reached levels unhelpful to both the US and Europe.
Policymakers on both sides of the Atlantic want to avoid a situation in which the dollar falls too far against the euro, before snapping back as investors realise the US is not heading for a depression and Europe is starting to soften, too. Such abrupt currency movements could fuel instability in financial markets.
Top officials also want to avoid the possibility that further dollar weakness could reinforce the rise in oil prices. They do not think the dollar is the main cause of the rise in oil – which has gained on days when the dollar has strengthened. But they agree that at times dollar weakness has contributed to oil's strength.
A senior US official highlighted the importance of the latest G7 communique about currencies, which he said represented an important shift in establishing a new agreed position on the dollar. Many analysts still reckon the US has a policy of benign neglect towards the dollar – welcoming the boost from dollar weakness to exports – even though the administration says it favours a “strong dollar”.
However, the US intended the communiqué to signal it does not want the dollar to weaken any further and, in the context of a likely US recovery, feels it had reached the stage where it was oversold.
“The short term was getting more attention than the long term,” the senior US official said.
----May 8th 2008
