Increasing scrutiny of hedge funds is shaping up as a major theme for this weekend's meeting of finance ministers from the Group of Seven nations, with currency valuations lower down the official agenda.
Host Germany wants the G7 to use the February 9-10 meeting in Essen to address what it sees as risks to the stability of the financial system from the $1.7 trillion hedge fund industry. "More transparency is the missing link," Bundesbank board member Edgar Meister told Reuters. "It's a considerable success that this has made it to the G7 agenda and that it will be worked on further."
Ministers will also assess the global economy. But officials have given mixed signals as to how far this will include foreign exchange rates. Euro zone officials want to address the value of Japan's yen, but this push has won no support from the other G7 nations - Japan, the United States, Britain and Canada.
Germany has lobbied its G7 partners to address hedge fund transparency. Such funds, which often borrow heavily and use complex trading strategies aimed at generating consistent above-market returns, have grown rapidly in the last five years.
Financial regulators say lack of information about their investments means it is difficult to know where the risks lie. Meister, who heads the European Union central banks' banking supervision committee, said hedge funds helped financial stability through spreading risk and increasing market liquidity and efficiency.
"But they can also be a source of increased systemic risk. and that's why it's being brought up at the G7 level," he said. G7 officials have given conflicting signals on currencies.
German Finance Minister Peer Steinbrueck said last week that in the last three years the yen's fall against the euro had "been to such an extent that in Essen we are going to be talking about that".
A European G7 official said on Tuesday the exchange rates of the Japanese yen and Chinese yuan are putting undue pressure on the euro and the eurozone. "The euro's taking a disproportionate part of the adjustment burden," said the official, speaking on condition of anonymity.
Meanwhile a French official told reporters: "It's no surprise - it's a G7, there will be discussions on foreign exchange." Officials across the Atlantic have been easier on the yen. Last week, US Treasury Secretary Henry Paulson said he was satisfied the value of the Japanese currency was set in competitive markets as it should be.
On Monday, a senior Canadian official said a discussion of the yen or the yuan would not be a focus at the G7 meeting. Germany has invited China and other big emerging market economies to the meeting along with its G7 peers. EU Economic and Monetary Affairs Commissioner Joaquin Almunia said on Tuesday he could not tell whether finance ministers from the Group of Seven nations would make a statement on currencies at their meeting later this week.
"I cannot anticipate whether there will be a common statement on foreign exchange. I don't exclude it because there usually has been one in the past," said Almunia, who is due to attend the Essen meetings. Europe also sought to address the yen's value at the last G7 meeting of finance ministers and central bankers in Singapore in September 2006, with little result.
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