UPDATE: Lagarde: G7 View On Yuan To Allay Tension On Euro

WASHINGTON -(Dow Jones)- French Finance Minister Christine Lagarde Friday expressed confidence that the Group of Seven nations' forceful language on the Chinese yuan would help relieve some of the upward pressure on the European currency, despite the strong euro getting no direct mention in the G7's final communique. "The Chinese president has said during the Communist Party Congress that he wishes to increase the convertibility and the flexibility of the yuan," Lagarde said during a press conference after the G7 leading industrial nations released their statement. "This is good news. I am happy that in this G7 communique there is a specific paragraph about the yuan, calling for an accelerated appreciation of the effective exchange rate of the yuan against other currencies, and notably the euro." The G7 communique calls on China to allow "an accelerated appreciation of its effective exchange rate," in view of this country's "rising current account surplus and domestic inflation." French officials Friday said this marks a significant shift of language compared with previous G7 communiques. The last G7 statement, following its meeting in April, called for the yuan to actually "move" instead of just for greater flexibility. "The whole part on China in the statement is new," Xavier Musca, the head of the French treasury said. "It praises China's recent initiatives to let its currency rise against the dollar, but it also underlines new tensions in the country. This means Chinese authorities have to use all the tools at their disposal to unwind imbalances by letting the yuan appreciate against all currencies, not just the dollar." China is the only country to be singled out for its currency policy by the G7 communique, which doesn't mention the Japanese yen or the euro, despite the European currency trading close to record highs against the dollar. French President Nicolas Sarkozy has repeatedly bemoaned the strong euro, which he says is hurting French exports. France has tried to promote this view among other euro-zone countries, but with limited success. German Finance Minister Peer Steinbrueck recently says he favors a strong euro over a weak euro. Asked whether she would have liked the euro and the dollar to get a direct mention in the G7 statement, Lagarde said: "[U.S. Treasury Secretary] Henry Paulson and [Federal Reserve Chairman] Ben Bernanke made a reassuring assessment of the U.S economy, which is solid apart from the current weakness in the housing sector. They repeated that a strong dollar is in the interest of the U.S. I hope financial markets will recognize this, even if it hasn't been the case so far." The French finance minister also welcomed the G7 initiative to ask for more transparency on securitization transactions and on hedge funds in the wake of the liquidity crisis that roiled credit markets this summer, as well as the G7's call for better transparency and governance from sovereign wealth funds. "There is a growing consensus on these issues among G7 members," she said.

G7 Wants Faster Yuan Rise, Pledges To Stay Open To Trade

WASHINGTON -(Dow Jones)- Group of Seven nation finance ministers and central bankers Friday expressed their dissatisfaction with the pace of currency appreciation in China, but said remaining open to foreign trade and investment is essential to supporting economic growth. G7 ministers, meeting ahead of the International Monetary Fund and World Bank annual meetings, said recent financial market turbulence, high oil prices and weakness in the U.S. housing sector would probably moderate global economic growth. Ministers pledged to resist protectionism, keep inflation under control, and as in years past, promised to pursue economic reforms and budget discipline to make global economic growth more sustainable. "We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate," the G7 ministers said in a statement following their meeting. The G7 also reiterated its standard position that currency values should reflect economic fundamentals and that excess volatility is undesirable. "We continue to monitor exchange markets closely, and cooperate as appropriate," the G7 said, a repeat from its statement in April. Since the fall of 2003, G7 finance ministers have called on China, with increasingly sharper language, to allow market forces greater influence on the value of its currency, the yuan. Friday's statement marks a shift from calls for more yuan flexibility, to a plainer demand for more appreciation. The yuan has been appreciating steadily. It is up a little over 10% against the dollar since China abandoned its currency peg in July 2005. But China's trade surpluses have continued to mount while foreign exchange reserves, accumulated through foreign exchange market intervention, are soaring. Frustration with the slow pace of reform is growing in the U.S. and in Europe, where euro appreciation is making exporters less competitive. Canada, too, is feeling the pinch from a stronger currency on its exports. "We face challenges adjusting to the rise of the Canadian dollar, which has borne the brunt of the U.S. dollar adjustment," Finance Minister Jim Flaherty said in a press conference. He figures Canada has taken about a third of the burden as the U.S. trade deficits have moderated, while the euro area has taken another third. Canada and European governments want China and the rest of Asia to absorb more of the hit to exports as U.S. demand slows. However, Chinese central bank officials, speaking at a conference on the sidelines of the meetings, said they believe structural economic reforms will have a greater impact on Chinese trade surpluses than currency appreciation. "China's trade surplus was mainly a result of imbalanced domestic economic structure, as well as international labor allocation and the international monetary system," People's Bank of China Deputy Governor Wu Xiaoling said. Tight credit and financial market turmoil is compounding the slowdown in growth in the U.S. and Europe, creating still more pressure by domestic industries for protection from imports. The G7 ministers said trade and cross-border investment promote economic prosperity. They said the global economy can benefit from growing investment by sovereign wealth funds - government-owned pools of capital, some of which have swelled with proceeds of foreign currency market intervention. And the ministers again called for rapid completion of the long-stalled Doha Round of trade negotiations. Later Friday, G7 ministers planned a dinner with representatives of countries holding the largest sovereign wealth funds, several of which have assets worth more than $100 billion. Participants invited to the dinner included China, South Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore and the United Arab Emirates. The G7 is worried the growing clout of these investment funds could distort financial markets, should fund managers make investment decisions for political or strategic reasons rather than to maximize profits. U.K. Chancellor of the Exchequer Alistair Darling said that sovereign fund investment "needs to be a two-way process and crucially, companies and sovereign wealth funds have to act on a commercial basis not on any other basis." Ministers are also concerned the prospect of foreign funds making more equity investments in companies could spark protectionism. "We see merit in identifying best practices for sovereign wealth funds in such areas as institutional structure, risk management, transparency, and accountability," the G7 said. The G7 said it was examining the causes of the credit market crisis of late August and September, and that it discussed a report from the Financial Stability Forum. Ministers also discussed reform of the IMF and the World Bank, saying the G7 would continue to work toward a package of reforms to increase representation for developing countries to better reflect changes in the global economy. That goal is a ways off since outgoing IMF Managing Director Rodrigo Rato failed to secure agreement on key elements of a deal before stepping down at the end of the month. G7 aides said that incoming managing director Dominique Strauss-Kahn will essentially have to start from scratch in developing an agreement to overhaul IMF voting shares. The G7 also talked about the need for a coordinated approach to energy security and climate change and discussed ways to increase investments in clean-energy technology. However, ministers made only passing reference in their communique to oil prices, despite crude oil futures price tiptoeing above $90 per barrel this week. Speaking to reporters, European Central Bank governing board member Axel Weber said Friday high oil prices are "an upside risk for inflation development and it is a downward risk for economic development." G7 officials noted that global growth has held up through steady increases in crude oil prices through the last several years.

UPDATE: Trichet: Important US Says Strong Dlr In US Interest

UPDATE: Trichet: Important US Says Strong Dlr In US Interest (Updates with more details) WASHINGTON (Dow Jones)--European Central Bank President Jean-Claude Trichet said Friday it was "very important" to hear the U.S. saying a strong dollar is in the country's interest, and he said that the ECB's monetary policy stance has remained unchanged since its last interest rate setting meeting. "We have said that monetary policy must remain vigilant in maintaining price stability," he said at a briefing following the meeting of finance ministers and central bank chiefs of the Group of Seven leading industrial nations, regarding the G7's communique. He said that "there was nothing new" in the ECB remarks at the G7 meeting and "we confirm fully our monetary policy." The ECB left its key policy rate unchanged at 4.0% on Oct. 4; it's likely to stay there through November, analysts say. Speaking at the same press conference, Luxembourg's Prime Minister and Finance Minister Jean-Claude Juncker, who heads the so-called Eurogroup of 13 countries using the euro, said he noted with greatest attention the U.S. strong dollar policy stance. U.S. Treasury Secretary Henry Paulson told reporters following the G7 meeting Friday that "I believe in a strong dollar." Overnight Thursday, the euro hit a fresh all-time high of $1.4320, in part a reflection of the narrowing interest rate differential between the two currencies since the U.S. Federal Reserve cut its key interest rate last month. Trichet also noted that the G7's communique changed its language on China and its currency, the yuan. In the statement, the G7 praises China's decision to increase the flexibility of its currency. But the communique adds that "in view of its rising current account surplus and domestic inflation, we stress (China's) need to allow an accelerated appreciation of its effective exchange rate." Juncker said that he, Trichet and European Commissioner for Economic and Monetary Affairs Joaquin Almunia will visit China Nov. 27-28. Asked about the spike in oil prices, after oil futures set a new record overnight of over $90 a barrel amid tensions in the Middle East, Trichet said that both oil prices and commodity prices pose an upside risk to inflation and a downward risk to economic growth. Juncker said that uncertainty and downside risks to the economy have increased. And while global economic growth should remain robust, the 13 countries sharing the euro will see growth slowing in 2008. He forecasts euro-zone growth of 2.5% for this year and 2.1% for 2008. Juncker added that Japan's finance minister and central bank governor said at the G7 that they believe the Japanese economy is on a sustainable recovery and that exchange rates "should reflect these economic fundamentals." "We are confident that growth developments will be recognized by market participants and will be incorporated in their assessment of risks," Juncker said. "We want the markets to be aware that the risk of one-way bets, and particular on the foreign exchange markets." He was referring to the popular carry trade, in which investors borrow the low-yielding yen and invest in higher-yielding currencies. "We do think that the reduction of the imbalances should be a cooperative process," Juncker said, adding that Europe has played its part by implementing structural reforms. Several euro-zone politicians have said they are worried the strong euro could hurt exports, with some even calling for the ECB to do something to halt the euro's rise. They believe the euro zone is bearing the brunt of the dollar's decline. Turning to recent financial market turmoil caused by defaults on U.S. subprime mortgages, Trichet said there are still lessons to be drawn from this turbulence. The G7 comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada.

Dollar Supported By Last Week's US Data; Quiet Trading

NEW YORK (Dow Jones)--The dollar is firming Monday morning in New York as a lack of fresh data or news during a holiday lull allows last week's positive economic report to continue support the greenback in quiet trading. The release of stronger-than-expected employment data Friday, which signaled that the U.S. economy is likely to skirt an outright recession, is keeping market confidence in the greenback inflated Monday - a reaction that was unable to gain momentum Friday when a massive purchase of euros reversed dollar gains versus the single currency. Now, the dollar has reached its highest levels against the yen since mid-August, just before the Federal Reserve cut its benchmark interest rate target. So far, it reached an intraday high of Y117.51. The dollar is likely to remain in current ranges ahead of the release of September inflation data in the producer prices report and September retail sales data, both out Friday. A holiday in Japan, Columbus Day in the U.S., Thanksgiving Day in Canada will keep consistency the theme Monday, as bonds markets remain closed. Early in New York, the euro was at $1.4090, from $1.4139 late Friday, while the dollar was at Y117.49, from Y116.90. The euro was at Y165.54, from Y165.31. The U.K. pound was at $2.0400, from $2.0415, according to EBS. The dollar was quoted at CHF1.1834, from CHF1.1778. The payrolls report Friday "raised concerns about whether the Fed had needed to cut rates (50 basis points) and helped to reduce expectations of another rate cut at the end of this month to 50% from 70%," said analysts at Brown Brothers Harriman & Co. "With sentiment likely to swing further away from a Fed cut in (October), the euro risks a break of the 1.4030 area tested late last week. That would open up a bigger move to 1.3930 support," according to BBH. Europe's response to the rising euro could dominate a meeting of euro zone finance ministers later Monday in Luxembourg. The ministers' main task will be forging a common European stance before the meeting of the Group of Seven leading industrial nations in Washington later this month, said analysts. Markets will look for signs that the finance chiefs want strong medicine, an ECB rate cut or even a coordinated effort to prop up the U.S. dollar. The finance ministers could suggest a G7 statement urging the U.S. to pursue a stronger dollar and calling for China to let the yuan float more freely. Previous G7 statements have stressed only that volatile currency swings and global imbalances are bad for economic growth. However, economists suspect the finance ministers aren't betting the farm on any particular wording and will instead look for a solution closer to home, pressuring the ECB to help ease the euro's rise. European Central Bank President Jean-Claude Trichet, a champion of the central bank's independence, will attend Monday's meeting. In Asia, four monetary policy meetings are scheduled this week: Monetary Authority of Singapore, likely to maintain a tightening bias; Bank Indonesia, likely to maintain rates; Bank of Korea, which could pause after a surprise hike on Aug. 9; and Bank of Thailand, which might cut rates by 25 basis points, analysts suggest. Currency analysts also note the top performance of the Australian dollar, which captured the limelight Monday by rising to a 23-year high of $0.9022 from $0.8973 late in New York closing Friday. Expectations for a further rate hike by the Reserve Bank of Australia, coupled with belief the worst of the sub-prime mortgage credit crisis has eased, has some analysts expecting the Australian dollar to climb even further. Australian Treasurer Peter Costello noted its high levels on Monday, saying they will create a difficult trading environment for the country's exporters. "This really represents a record level for the Australian currency, particularly when you take it into account against other currencies as well in what we call the trade-weighted index. It is at a very high level," Costello told ABC radio in Melbourne. "All things considered, a strong currency - whilst tourists like it - is not all that good for your economy and it is not particularly good for your exports," he added. Nonetheless, much like the European finance ministers, Costello ultimately has limited authority in doing much about currency levels. "Intervention is unlikely to limit longer term investment and with a strong economy, the (Reserve Bank of Australia) is likely to remain hawkish," said Brown Brothers Harriman analysts.