RPT-ANALYSIS-Dollar under spotlight as first Trump-era G20 eyes FX stance overhaul


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    * G7/G20 Factbox [L5N1FT693]
    * First G20 meeting since Trump's inauguration
    * Language of draft communique signals shift of emphasis
    * Draft takes aim at "excessive global imbalances"
    * Weaker dollar would benefit U.S. exports, manufacturing

    By Jamie McGeeverLONDON, March 9 (Reuters) - A draft communique prepared for
next week's gathering of G20 finance chiefs has dropped the
group's standard pledges on the need for flexible yet stable
exchange rates and orderly markets, suggesting it could prove a
landmark event for currency markets.
    The world's most powerful finance ministers and central
bankers convene in the German spa town of Baden-Baden on March
17-18, their first meeting since Donald Trump's U.S. election
victory in November and his reaffirmation of an avowedly
protectionist, 'America First' stance on international trade.
    Solid U.S. economic activity and rising inflation are
pushing interest rates and the dollar higher. But the White
House would clearly prefer a weaker currency to help U.S.
exports, manufacturing and competitiveness on the global stage.
    Figures on Tuesday showed the U.S. trade deficit in January
was $48.5 billion, the widest in nearly five years.
    The draft communique seen by Reuters has removed references
to "excess volatility" and "disorderly" FX moves from last
year's statement, as well as a pledge to refrain from
"competitive devaluations".
    It has also reintroduced - for the first time in more than
10 years - a reference to "excessive global imbalances", an
apparent swipe at hefty trade surpluses in Germany and China.
    Taken together, these changes could be seen as another
indication that Washington - without taking direct action or
explicitly saying so - is resisting a strong dollar, which it
blames for its stubborn trade deficit and manufacturing decline.
    The draft communique remains subject to change. And there is
unlikely to be any appetite for currency wars, so the pledge to
resist "excess volatility and disorderly movements" and refrain
from "competitive devaluations" could still get reinserted.
    Nevertheless, if the final document bears any resemblance to
its current guise, it will be a clear sign that the new White
House administration is flexing its muscles on currencies and
trade. [nL5N1GK5BZ]
    "The wording of G7 and G20 statements has been used to
justify specific actions or to send specific warnings in the
past. If the wording sets the parameters for currency policy, it
is therefore significant when it changes," said Simon Derrick,
head of global rates strategy at Bank of New York Mellon.
    Derrick pointed to the G7 wording on exchange rate
'flexibility' in Dubai, 2003, and 'global current account
imbalances' in Boca Raton, 2004. Whatever was said at the time
about what they meant, the fact is that Japan stopped
intervening in FX markets to weaken the yen in 2004, he said.

    G20 members are unlikely to want their own currencies to
appreciate much, if at all. But the reintroduction of the phrase
on "global imbalances", at a time when trade is firmly back on
the international political agenda, "is clearly intended to send
a strong message", Derrick added.
    One G20 government official said the group was still
debating exactly what signal it wanted to send on FX: "Whatever
it is, we want to make sure it's not misunderstood by markets."
    Since Trump's election victory in November the White House
has accused Japan, China and Germany - three of America's five
biggest trading partners - of deliberately engineering
undervalued exchange rates for competitive advantage, drawing
frosty responses and stirring currency market volatility.
    The dollar hit a 14-year high in January <.DXY> and the
latest Reuters poll of more than 60 FX strategists shows the
bias is for further strength over the coming year. http://tmsnrt.rs/2k8GCSM
    Treasury Secretary Steve Mnuchin, who was only confirmed in
his post on Feb. 13, has repeated the Treasury's long-held
mantra that a strong dollar is a "good thing" as it reflects
confidence in the relative strength of the U.S. economy.
    But he has warned that "certain aspects are not as positive"
in the short term, and also told International Monetary Fund
Managing Director Christine Lagarde he expects the IMF to
provide "frank and candid" analysis of exchange rate policies.
    Since G20 finance ministers and central bank governors began
meeting in 1999, and then leaders in 2008, the role of exchange
rates "to reduce countries' vulnerability to economic crises"
has consistently been discussed, according to the G20 Research
Group at the University of Toronto.

    Ernst Welteke, former president of Germany's Bundesbank and
a veteran of several G7 meetings, said that if countries want to
improve their competitiveness on the international stage they
should address their own problems themselves.
    "The German surplus is always a concern for others, but the
only way to address this is to become more competitive," Welteke
told Reuters.
    "It's not the exchange rate that's responsible for the
German trade surplus, it's the quality of the product. What are
you going to do - tell China to import less?"
    On March 15, two days before the G20 meeting starts, the
Federal Reserve is widely expected to hike U.S. interest rates
again, a move that could further cement the dollar's status as
the currency of choice for global FX investors.
    The greenback has been climbing steadily since 2014, gaining
almost 30 percent in the last two years and culminating in a
14-year high on a trade-weighted basis in January.
    But that's almost certainly not enough to warrant any
official action. Not yet, anyway.
    In the early 1980s, the dollar surged 80 percent under
then-president Ronald Reagan, prompting Federal Reserve chairman
Paul Volcker to forge a rare G7 agreement - although only 5
nations participated - to bring it back down. That was the
"Plaza Accord", the most renowned and successful example of
coordinated currency market intervention of modern times.
    According to the IMF, the dollar was 30 percent over-valued
at the time of Plaza, which is around twice the mid-point
over-valuation of 15 percent estimated last year.

 (Reporting by Jamie McGeever; Editing by Gareth Jones)
 ((jamie.mcgeever@thomsonreuters.com; +44)(0207 542 8510;))


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