G-7 Says Economy ' Strong,' Urges Asian Currency Gains

April 22 (Bloomberg) -- The Group of Seven said the world economy is in "strong" shape and called on some Asian nations, especially China, to allow their currencies to appreciate.Finance ministers and central bankers from the group said prospects for continued economic expansion are favorable, even as oil prices climb to a record. Stronger Asian currencies and less reliance on exports for growth can help reduce imbalances that jeopardize that encouraging outlook, the officials said. "The global economy is in the best shape it's been in a long, long time with strong growth, high productivity, inflation well-contained," U.S. Treasury Secretary John Snow said at a press conference after the G-7 meeting in Washington yesterday.

The world economy is on its surest footing since the start of the decade as growth in Japan and the euro region picks up, while the U.S. probably enjoyed the fastest quarterly expansion in more than two years. In a separate statement, the G-7 said it's "critical" China let the yuan advance and some oil producing nations allow more fluctuation in their currencies. "In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, easing reliance on export- led growth strategies, and actions to strengthen financial sectors," the statement said.

New Language

The language is a departure from the words the G-7 usually uses to address China's exchange rate. Past communiqués have referred only to the need for more flexibility without saying whether the yuan should strengthen or weaken.Officials bolstered the language because they felt China's efforts to increase the flexibility of its currency have been too slow, a Japanese finance ministry official told reporters in Washington late yesterday on the condition of anonymity."They have clearly started to apply more pressure," Lara Rhame, a currency strategist at Credit Suisse in New York, said in an interview. "They have singled out China and the rest of the emerging market economies." Asian currencies will probably rally when markets open on April 24, Rhame said. French Finance Minister Thierry Breton said Japan may let the yen advance as its economy rebounds and deflation ends. "It's a positive story for Asian currencies, especially with these kind of statements," said Irene Cheung, an economist and strategist at ABN Amro Holding NV in Singapore. "If we see the yuan and the Korean won head higher on Monday then that will set the mood and most other Asian currencies will move higher too."

"Not the Message"

The G-7 remarks on exchange rates aren't an invitation to sell the dollar against currencies outside Asia, said European Central Bank President Jean Claude Trichet. "This is certainly not the message," Trichet told reporters after attending the meeting. "It would be a mistake" to interpret it as a de-facto call for a stronger euro, he said. The euro has climbed 4.2 percent versus the dollar this year.The G-7 gathering followed a meeting between President George W. Bush and Chinese President Hu Jintao at the White House that did little to narrow differences over China's managed exchange-rate system. The yuan has gained 1.2 percent since a revaluation in July.The U.S. trade deficit with China widened to a record $202 billion last year, a quarter of the current account shortfall, which reached an unprecedented $805 billion. The current account is a measure of trade, services, tourism and investments. Snow is under pressure from the U.S. Congress to brand China a currency manipulator for keeping the yuan artificially low to boost exports.

Oil Prices

The International Monetary Fund this week raised its forecast for global economic growth in 2006 to 4.9 percent from a September prediction of 4.3 percent. At the same time, the G-7 said it's worried about rising oil prices, protectionism and imbalances reflected by the U.S. current account deficit and China's surplus. The G-7 represents almost two-thirds of the world economy, comprising the U.S., Japan, Germany, the U.K., France, Italy and Canada. Snow, European Central Bank President Jean-Claude Trichet and Japanese Finance Minister Sadakazu Tanigaki are among officials who signed off on the statement.With oil jumping to an all-time high of $75.35 a barrel on the New York Mercantile Exchange yesterday, energy prices remain "a risk" to the economic outlook, the G-7 statement said. Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, calculates each $10 increase in the price of oil knocks 0.5 percentage point off growth in the G-7. To correct imbalances, the U.S. must reduce its budget deficit, Japan and Europe must boost domestic demand and Asian nations must loosen the tethers on their currencies, the G-7 statement said, repeating language from previous meetings. At least part of that prescription is starting to come true. Japan's economy will expand 2.8 percent in 2006, the most since 2000, and the euro area's gross domestic product will increase 2 percent this year, according to this week's IMF growth forecasts.The separate statement on imbalances also called on oil- producing countries to accelerate investment in production capacity and to diversify their economies, and for other "current-account surplus countries" to boost domestic consumption and investment.Following their formal meeting, the G-7 held a working dinner with China, Saudi Arabia, Russia and the United Arab Emirates. China is the world's second-largest consumer of oil after the U.S., and Saudi Arabia, Russia and the UAE are the world's biggest, second-largest and sixth-largest oil exporters.