Central bankers from the world's most important economies welcomed yesterday a promise by the United States to tackle its budget deficit, which is plaguing the US dollar.
Failure to correct the huge US trade and budget deficit could undermine a world economy that is expected to grow at a healthy 4 per cent pace or better this year, Group of 10 chairman Jean-Claude Trichet told a news conference.
"We were certainly aware of the declaration of [ US Treasury] Secretary Snow as regards the will of the US government to take into account the necessity of reducing the fiscal deficit," he said.
"It was said very, very clearly by Secretary Snow, and I take it that it is certainly very important."
Investors and central bankers were growing increasingly nervous that there could be a dollar collapse unless the United States starts weaning itself off foreign money to finance its huge budget and trade deficits.
Pressure is mounting for US action after International Monetary Fund head Rodrigo Rato on Sunday called the US current account deficit topping 5 per cent of GDP, "truly excessive".
In an unusual move, Mr Rato attended yesterday's G10 discussion among central bankers from top industrialised and emerging countries on the global economy.
The Bush administration in early February unveils its budget plan and US Treasury Secretary John Snow last Friday gave the first hint of coming budget discipline, saying he wants to "do things" to sustain the dollar and work with Congress to cut the US budget deficit down.
Mr Trichet said the "working assumption" of the G10 was for a smooth and progressive unwinding of global economic imbalances.
This would require the US to save more and cut its deficits, and demand to pick up in Europe and Japan.
Currency analysts and economists cautiously greeted the G10 comments as an early sign the United States and its allies now agree that it is too risky to rely on lopsided global growth, where a deeply indebted United States remains the engine of the world economy.
"They seem to agree at what lies at the root of the problem - that may give the dollar more support," said Mr Adam Cole, senior currency strategist at the Royal Bank of Canada.
The euro has borne the brunt of dollar declines the past year, and Mr Trichet further embraced the significance of Mr Snow's remarks for the euro zone by swapping his hat as G10 chairman for that of ECB president to applaud the US words.
On the global economic outlook, Mr Trichet said central bankers were confident for a favourable performance this year. Last autumn's growth blip was likely to be only temporary, especially as the economy seemed to have absorbed the shock of oil-price hikes and because a build up in company inventories seems to have subsided.
