The dollar is expected to come under renewed pressure on the foreign exchange markets today after Mr John Snow, US Treasury Secretary, suggested the long-standing strong dollar policy did not imply any view about the exchange rate. He also played down the dollar's recent fall as "a modest realignment".
After meetings with Group of Seven and Group of Eight finance ministers in Deauville, France, Mr Snow said his understanding of a strong dollar was that people should have confidence in it.
"You want them to see the currency as a good medium of exchange, you want the currency to be a good store of value, something that people are willing to hold, you want it hard to counterfeit." The dollar's value, he said, "reflects the fundamentals of demand and supply for currencies".
The dollar has lost 9 per cent of its value against the euro this year. Speaking after Mr Snow, Mr Rob Nichols, the Treasury spokesman, said there was no change in US policy. But the secretary's remarks are likely to be taken as a signal that the US administration would be content to see the dollar fall further. Since the mid-1990s, the strong dollar policy has relied on rhetoric to support the exchange rate, rather than intervention or interest rate changes.
The rhetoric provided reassurance that the US would not intentionally attempt to drive the dollar lower and might at some point be prepared to support it. Mr Snow has undermined that reassurance.
His comments came after data showing signs of flagging growth and falling inflation heightened fears of deflation in the US.
Meanwhile, the ministers gave a cautious assessment of the global outlook for the world economy, warning of "many challenges", despite the end of the war in Iraq, and arguing more strongly than ever for structural reforms to strengthen growth. They promised reforms "to achieve a more flexible economy".
Mr Francis Mer, France's finance minister, who chaired the Deauville meetings, said: "We all know this is one of the conditions we want to meet if we want the economy to be able to benefit from the good times and respond to the bad times."
UK chancellor Mr Gordon Brown described the communique as "the strongest statement that has been made at a G7 finance ministers' meeting about the need for reform".
European governments have wanted to show that they are prepared to press ahead with reform in spite of stiff opposition, as in the case of the mass protests last week against government plans for pensions reform in France.
The ministers were guarded about prospects for stronger world growth. Data last week showed growth had slowed to a halt in Japan and the euro zone in the first quarter of the year.
They also committed themselves to" increased resources" to fight global poverty, without specifying any new commitments, such as the International Financing Facility proposed by Mr Brown.
That plan, which would create a body able to borrow against promises of government development aid, in the future, will be looked at again in September after a report by Mr Mer, who said the idea "really makes a lot of sense".
But Mr Snow added: "The best single thing we can do for the less developed countries is raise our own growth rate." - (Financial Times Service)
