Top central bankers said on Sunday they were keeping a wary eye on currencies after a tumble in the US dollar in the past few months has raised the spectre of upheaval for the global economy. But so far the world economy and financial markets appear to be adjusting to a raft of dramatic changes - the broad dollar sell-off on Friday to multi-year lows, oil prices at records last month above $50 a barrel and the first Chinese interest rate hike in nine years.
"We are keeping wary eyes on movements in exchange rates ... all exchange rates," Bank of Japan Governor Toshihiko Fukui said as he arrived for meetings here of Group of 10 central bankers from major industrialised and developing countries.
"We worry about everything, so I would be lying if I said we were not worried" about currency moves, said Bank of Canada Governor David Dodge.
The dollar hit a record low against the euro on Friday and a six-month trough versus the yen as concern spread over the US economy and whether newly re-elected US President George W. Bush would tackle the US current account deficit.
Still, after a meeting on global financial stability, one euro-zone central banker said there was a view that market reactions have been remarkably benign in face of such major shocks recently, and that was reason to take comfort.
There has been speculation that the US administration might want to see a weaker dollar to narrow its huge deficit, which has topped 5 percent of national output and growing.
Asked if the US administration wanted to guide the dollar lower, Fukui said: "I don't think so necessarily."
Federal Reserve Chairman Alan Greenspan, who often sends his deputy, was attending these G10 meetings where several officials said the US twin budget and trade deficits would be discussed on Monday as part of the global economic outlook.
Finance ministers from Group of Seven top industrialised nations regularly call for the US to cut its deficit, Asia to make its currencies more flexible and Europe to stimulate growth by deregulating its economy. But it is the US dollar's sharp retreat over the past few months that are putting the US in the spotlight here.
Its deficit is funded by a voracious appetite for US assets from Asian countries that are selling their own currencies against the dollar as they intervene in foreign exchange markets to weaken their currencies and make their products more competitive on global markets.
Squeezed in the middle is the euro currency, driven to a record high at $1.2973 on Friday as the dollar sank, raising concerns it would slow the euro-zone's weak recovery.
ECB President Jean-Claude Trichet, who also chairs the G10, declined any comment on the euro as he entered a meeting, saying he would wait until his news briefing on Monday.
The ECB has pressed for Asian countries to allow more flexibility in their exchange rates. This should eventually relieve upward pressure on the euro. But no rapid change in Asian exchange rate systems is expected.
In fact right now dollar weakness feeds more euro strength. Amando Tetangco, Philippines deputy central bank governor, said a tumbling dollar makes it even more attractive for Asian central banks to buy euros to diversify their foreign exchange reserves. "Diversification is happening now. Asian countries have been going for other currencies, the euro for instance. But diversification would become even more attractive," Tetangco told Reuters in an interview. On global growth, Dodge said world output was not expected to be as heated as 2004 but still strong. Likewise in Japan and the US, Fukui said the growth rate "might go a bit lower but we are on a sustainable and stable path, that's how we see it."
As for China's decision to raise its one-year lending rate in October to 5.58 percent from 5.31 percent, the first official rate hike in nine years, Dodge applauded the action as a sign of a maturing economy where markets are becoming more sophisticated, allowing China to use interest rate policy rather than credit regulations to affect banking and credit conditions.
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