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Debate on exchange rates

Murky world of forex takes centre stage

AFP, London
Foreign exchange markets are usually the concern only of traders, companies and those about to go on holiday, but analysts say that with the dollar's recent swift falls, they could now prove the catalyst -- or the undoing -- of a global economic recovery.
The sometimes arcane world of currency baskets and trade-weighted indexes moved from the business pages to the front pages a fortnight ago following a meeting of the Group of seven rich nations' club in Dubai.
There, G7 finance ministers and central bankers issued a statement calling for "more flexibility in exchange rates", based on market mechanisms.
Experts agreed unanimously that this was a clear call to Asian nations, principally Japan and China, to free up their currencies rather than keeping them artificially low.
A weak currency usually helps a
country's economy as, among other effects, it makes foreign exports more affordable for nations purchasing with their own money.
The issue was already an increasingly hot one even before the G7 meeting, with Us companies complaining that a weak Chinese yuan -- which is pegged to the dollar at a fixed rate -- was costing thousands of American jobs.
When foreign exchange markets re-opened on the Monday following the G7 communique, the dollar plunged against both the yen and the euro and has remained under pressure ever since.
Comparisons have been made with the so-called Plaza accord, a deal reached in september 1985 by the world's five leading industrialised nations at the time and named after the Plaza Hotel in New York where they met.
This agreed a controlled weakening of the then-overvalued dollar to help the Us economy, and had a huge long-term impact, helping Us
companies to prosper, although often at the expense of those in Japan and Germany.
The G7 communique is a different proposition, experts stress.
"The key point about the Plaza accord is that there was a specific commitment to weaken the dollar, with action to follow," said Julian Jessops, an economist with bank standard Chartered.
"There was no such specific commitment (at the G7 meeting), and nobody is going to take active measures to weaken the dollar. They are going to leave it to the market. That's the fundamental difference."
Nonetheless, with Japanese authorities having intervened only slightly to rein in the yen since the meeting, the impact of the G7 statement appeared both planned and fundamental, said Commerzbank analyst Nick Parsons
"I think the actions of central banks already are consistent with that." he argued.