by Mike Dolan
LONDON (Reuters) – Japan may seem like the lone voice in the Group of Seven calling for some calm in the currency, but the rest may notice more than it seems at first glance.
Almost every other economic and political metric these days seems to date back to the 1980s – so ideas about massive G7 currency market intervention seem less outlandish against this background.
The US dollar index has only posted year-over-year gains at the current pace of 20% on four other occasions since its historic rally in 1985 prompted then-G5 forces to intervene en masse to stem the dollar’s rally.
These four sharp increases in the dollar came during the European exchange rate crises of the early 1990s. Weakness of the euro in 2002/01 after the launch of the single currency; In the wake of the banking crisis in 2008; The oil crash in early 2015.
At least two of those moments involved some form of G7 or G20 action to calm the horses.
Is there a reason for this to happen again?
Revitalized as an effective governing council of the world’s major democracies in a time of divided geopolitics, the G7 may have other, more pressing battles to fight right now.
The last virtual meeting of G7 finance ministers this month focused squarely on plans to cap Russian oil prices as another punishment for Moscow for its invasion of Ukraine and as a way to curb rising energy costs and unleashed inflation.
There was no discussion about the alarming acceleration of the dollar against the Japanese yen, the euro and the British pound to their highest levels in decades – or the additional pressure it creates on dollar-priced energy imports into those countries, which in turn exacerbates the inflation and economic hit there simultaneously.
In a sign of growing concern about the yen in Tokyo since then, Japanese Finance Minister Shunichi Suzuki made frequent verbal protests against excessive currency moves on the sidelines of the meeting – adding that he would coordinate any response with his allies.
However, no mention of exchange rates found its way into the official one-issue statement.
Likewise, a wide-ranging statement from the G7 Leaders Summit in Germany at the end of June appeared to steer clear of currency issues as a primary issue, only pointing to outdated language on the desire for exchange rate stability.
But as Europe and Japan face high energy bills in dollars this winter, and European central banks at least chase the increasingly hawkish Fed in raising interest rates, the dollar’s rise is a serious nuisance to their ability to deal with what now looks like full-blown energy. . and economic war with Russia.
And if the risk of a global recession is rising rapidly, as the World Bank emphasized on Wednesday, the dollar’s rally is an exacerbating factor for both Europe and Japan as well as many fragile developing economies that have borrowed heavily in dollars.
The heart of the underworld
The World Bank study, warning of “spikes” from “simultaneous” tightening, which it said could mean another two percentage points of interest rate hikes from major central banks, said the global economy was already at its sharpest slowdown in the wake of the post-recession recovery. Since 1970.
If you’re looking for “spin effects,” look for the surging dollar. Over the past 12 months alone, it has risen 31% to a 24-year high against the yen, 21% to a 37-year high against the British pound and 18% to a 20-year high against the euro.
Since the G7 leaders meeting in June, the dollar has added only 5%-6%.
But the effect has already been recorded in inflation rates as well as the rapidly deteriorating trade deficits in the Eurozone, Japan and Britain.
In what looks like a world turned upside down for the traditional surplus economies of the aging eurozone and Japan, both on Wednesday posted explosive trade gaps over the summer as energy import prices and the dollar soared side by side.
Japan recorded its largest single-month trade deficit ever in August while the eurozone’s external trade balance was in deficit for the ninth consecutive month, with the euro’s deficit in the year ending July amounting to 177.4 billion euros, compared to a surplus of 121.3 billion euros in the same period. from last year.
While Britain may be aware of its chronic external deficit, the high cost of fuel imports priced in dollars has already reduced the current account gap to a record share of GDP this year.
The problem for the G7 nations, whose finance ministers and central bank governors meet again at the International Monetary Fund’s annual meeting in Washington early next month, is that this is starting to have an escalating effect.
Inflating trade gaps amplify currency weakness, which in turn inflates those deficits.
The European Central Bank has already begun to publicly point to euro/dollar weakness as a problem in its fight against inflation, and Bank of England President Andrew Bailey is constantly pointing to the dollar’s massive strength.
On Wednesday, ECB Vice President Luis de Guindos said frankly: “The depreciation of the euro is also increasing inflationary pressures.”
Thus, as the Bank of Japan ramps up its threats to intervene against the yen, it may begin to get a more sympathetic ear from its allies next month.
While the US may see the benefits of a rising dollar on the sidelines – these should be paled against the risk of global stress and recession and the need for solidarity in an economic war with Russia.
Echoes of the ’80s reverberate.
The opinions expressed here are those of the Reuters columnist.
(By Mike Dolan, Twitter (NYSE:): @reutersMikeD; Graphic added by Andy Bruce; Editing by Andrew Heavens)