The Wall Street Journal-20080206-Politics - Economics- Will Dollar Overshadow Yuan at G-7-- China May Bear Ire in Public- But Canada- Europe May Push In Private for U-S- to Halt Slide

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Politics & Economics: Will Dollar Overshadow Yuan at G-7?; China May Bear Ire in Public, But Canada, Europe May Push In Private for U.S. to Halt Slide

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WASHINGTON -- When the world's top economic officials meet in Tokyo this weekend, they will likely stand shoulder-to-shoulder to complain about the weak Chinese yuan. Behind closed doors, they are much more likely to squabble over the weak dollar.

The soft dollar is lifting U.S. exports and providing a cushion just as the U.S. teeters on the edge of recession. Europeans and Canadians are watching with alarm as their strong currencies make it harder for them to compete against U.S. companies -- and firms from countries whose currencies closely track the dollar.

"We don't want the euro to have to bear the brunt of currency adjustments by itself," German Deputy Finance Minister Thomas Mirow told reporters yesterday. A senior Canadian official complained this week about the spillover effects of the falling U.S. dollar, while French Finance Minister Christine Lagarde said last month that the euro is "a very strong currency" that disadvantages French companies.

The U.S. dollar has fallen nearly 16% against the Canadian dollar during the past year, while the American currency has slipped nearly 13% against the euro.

The Europeans and Canadians at the meeting of finance ministers from the Group of Seven leading nations are nearly certain to fail to convince Treasury Secretary Henry Paulson to try to stop the dollar's slide. The Bush administration has shown no inclination to meddle in currency markets, and U.S. officials have pointedly touted the success of American exporters.

"It's not as if the U.S. or Secretary Paulson has a magic wand and can decree there's going to be X% movement of the dollar against the euro and Y% movement against some other currency," said Matthew Slaughter, an economist at Dartmouth College and former Bush adviser.

The result is that instead of going public with their internal disagreements, the G-7 officials are expected to focus their collective ire on China. Beijing has allowed the yuan to rise about 15% against the dollar since it first allowed the currency to move in July 2005. When measured against the currencies of its major trading partners, the yuan has climbed only 9%. U.S., European and Canadian companies say the yuan is artificially weak and gives Chinese companies an unfair edge in international trade.

"I would still like [the yuan's climb] to move quicker, and we're working to persuade them," Mr. Paulson told the Senate Finance Committee yesterday, at a hearing in which he discouraged lawmakers from adopting legislation to punish China for its currency policies.

Mr. Paulson and the other economic officials are scheduled to have dinner with the finance ministers of China, Indonesia and South Korea after their own meetings wrap up Saturday evening.

"The Europeans in particular are concerned about the depreciation of the dollar," said Benn Steil, director of international economics at the Council on Foreign Relations, a nonpartisan think tank. "The U.S. response is to say, 'Don't blame us -- blame the Chinese.'"

Underlying the dissension within the G-7 is a gap between the interest-rate policies of the Federal Reserve Board and the European Central Bank. The Fed, which sees promoting economic expansion as one of its main objectives, has lowered short-term interest rates five times, by a total of 2.25 percentage points, in the past five months.

The ECB, whose mandate is to control inflation, has resisted politicians' calls to cut rates. In general, higher interest rates in Europe lift the European common currency, while lower rates in the U.S. weaken the dollar.

Fed Chairman Ben Bernanke and European Central Bank President Jean- Claude Trichet are expected to join the finance ministers in Tokyo. The G-7 talks "are going to be considerably more heated now, when the evidence has become more clear that the ECB and Fed are behaving -- in the face of the same [inflation] pressures -- in diametrically opposed ways," said Mr. Steil.

At the G-7 meeting, Mr. Paulson is also expected to brief his counterparts on the prospects of an emergency economic-stimulus package -- worth about $150 billion -- that is working its way through Congress.

Bank of Italy Governor Mario Draghi is scheduled to present the preliminary findings of the Financial Stability Forum investigation into the causes of the subprime-mortgage crisis and credit-market turmoil.

Germany's finance minister, Peer Steinbruck, plans to urge the G-7 nations -- Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S. -- to adopt tougher banking regulations to avoid a repeat of the subprime crisis. His ideas include requiring banks to cover their purchases of risky securities such as mortgage-backed bonds with more of their own capital, he said last week in an interview with German magazine Der Spiegel. That would make banks think twice about piling up such huge, yet murky, assets in the future, he said.

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Joellen Perry in Frankfurt, Andrea Thomas in Berlin, Yuka Hayashi in Tokyo and Alistair MacDonald in London contributed to this article.