MercoPress. South Atlantic News Agency

Strength of US dollar to be assessed in London G7 meeting

Finance ministers and Central Bank governors belonging to the Group of Seven, G 7, will assess in December how sustainable is the current strength of the US dollar and determine if the global economy can support the impact of the high oil prices.

A G7 source said that the group will also consider during the London meeting a more flexible long term exchange rate for the booming Chinese economy.

However G7 admits that at the moment there are no pressing arguments to demand Beijing to further revalue the Yuan, given China's low domestic inflation and the US dollar's strength.

"The dollar is strengthening but it's not a problem in itself, and financial markets are absorbing the changes. As long as it's an orderly adjustment, plus or minus, there's no problem", added the source.

"So long as the global economy expands with the same tendency, exchange rate variations will not have a great impact".

"We will therefore assess how sustainable is this dollar surge and also if there are risks of a reversion in the US dollar tendency", added the G7 source.

The fundamentals of the Euro zone remain weak and a drop in the value of the Euro is not a major concern of the European Central Bank, ECB.

However Jean-Claude Trichet, president of the European Central Bank has hinted that interest rates could rise soon.

The US dollar has climbed 10% against the Euro so far this year given the fact that US interest rates have been rising steadily and will continue to do so. Last December 2004 the US dollar dropped to an all record 1.3667 to the Euro.

The ECB has maintained interest rates at 2% for five years, but this could soon change.

"I consider that the governing council is ready to take a decision on interest rates," he said Mr. Trichet in a conference speech. Analysts interpret comments as an early announcement of a quarter percentage point rise at the ECB's next policy meeting on December first.

Mr Trichet added that the ECB is ready to "moderately augment the present level of intervention rates in order to take into account the level of risks to price stability that have been identified".

Inflation, which stood at 2.5% in October, has been above the ECB's 2% target for nine months. The move, however, is likely to spark fierce opposition from politicians in some of the biggest EU countries whose economies are still facing a slowdown.

More specifically regarding oil, the global economy so far has managed to resist the impact of the price surge which reached a record 70 US dollars per barrel for US light crude, before beginning to stabilise below the 60 US dollars pb. This however is almost double the price 18 months ago.

"Since G7 last meeting basically there have been no great changes. Oil prices will be in the agenda but the financial impact has remained contained so far", added the G7 source.

During last September's meeting G7 praised China's July 21 decision to float the Yuan tied to a basket of currencies actually revaluing its currency 2.1% against the US dollar. However, all G7 members believe China should advance to a more long term flexible exchange rate.

"Currently the value of the Chinese currency is climbing because of the strength of the US dollar", concluded G7 sources.