Consensus Reached In Currency War?

0 Comments | Insight on the News, March 1, 2004

Byline: Jamie Dettmer, INSIGHT

Consensus Reached In Currency War?

The weekend summit of finance ministers from the G7 leading economies ended in mid-February with an agreement to try to curb the slump in the value of the dollar against the euro. Participants at the 24-hour gathering at the Florida beach resort of Boca Raton also decided that Asian countries such as South Korea, Japan, Taiwan and China must share the burden of dollar fluctuations by refraining from intervening in the markets to keep their currencies from rising. The European press was delighted with the summit-ending communique, claiming it represented a victory for the Europeans, who have been pressing the Bush administration to condemn "excess volatility" on the global money markets and to hint at its readiness to intervene to stop abrupt currency movements.

The communique read: "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate." Jean-Claude Trichet, president of the European Central Bank, who last month lamented the "brutal" export-imperiling surge in the euro, hailed it as a "very good communique." He said there was "consensus" among the G7 about the currency fluctuations.

But it is less than clear there really is a consensus. The Bush administration continues to pay lip service to the idea that it is good for the United States to have a strong dollar, but in recent months it has been quite happy to see the dollar weakening in the short term a weaker dollar helps U.S. exporters.

At Boca Raton, U.S. Treasury Secretary John Snow continued with the line that a "strong dollar is in our national interest," but he added remarks that indicate Washington has little interest in joining other G7 countries in intervening in the currency markets. "The value of currencies is best established in open and competitive currency markets," he said. "Nobody can devalue their way to prosperity. An official prop under a currency doesn't make it a strong currency." Nonetheless, according to the Europeans, the Boca Raton summit will put a floor under the dollar's fall. But will it work? As likely, currency speculators will seek to test the resolve of the G7 and to discover whether there is any real political will for the leading economies to act in concert to try to curb currency fluctuations and to strengthen the dollar.

"Europe won the battle of Boca, but the currency war is far from over," cautioned Mark Cliffe, head of economics at ING Financial Markets.

Deficit Hawks Have Eye on Tax Credit

President George W. Bush's support for making permanent a $4.3 billion research tax credit is alarming conservative Republicans and other deficit hawks, who argue that such a tax credit will add to a record U.S. budget deficit.

The research tax credit was included in the fiscal 2005 budget request released in early February after heavy lobbying by corporations including Dow Chemical, Electronic Data Systems and Genentech. The companies say the credit encourages research and helps keep jobs in the United States.

The credit was scheduled to expire June 30, and the Treasury Department estimates making it permanent would reduce government tax receipts by $78.4 billion over 10 years, deepening the budget crisis.

Making the tax credit permanent has some tough opponents on Capitol Hill, including GOP Rep. Bill Thomas of California, chairman of the House Ways and Means Committee. In an e-mail interview with Bloomberg, Thomas wrote: "Our members need to determine priorities within the budget for tax relief and spending. It's premature to determine what they specifically will decide" on the credit.

House Budget Committee Chairman Jim Nussle (R-Iowa) also is thought to be unhappy with the move. "We have a lot of spending going on, and we have to control it," Nussle told GOP House colleagues at a meeting in early February.

Eurotunnel Springs Large Financial Leak

Eurotunnel, the Anglo-French operator of the 31-mile chunnel linking France and Britain, has reported a loss of $2.36 billion for 2003. It now is saying that it needs to refinance its debt and has urged the British and French governments to reduce the fees charged to railway companies. Eurotunnel Chief Executive Officer Richard Shirrefs says traffic growth is being strangled by high access charges to the tunnel. "We have too much debt to reduce them unilaterally," he said. Eurotunnel's total debt stands at $11.25 billion. He told reporters, "We're ready to cut our charges, but in exchange we need some help lowering our debt. How much we cut our charges depends on what we get in return."

The loss for 2003 contrasts with a profit of $600 million for Eurotunnel a year earlier. Competition from low-cost European airlines has hurt Eurotunnel, which also is facing a price war launched by cross-channel ferries. The tunnel, which was opened for traffic in 1994, never has realized fully the dreams of its backers. Originally it was projected that more than 17 million passengers would use the tunnel, but last year only 6.3 million did.