The Group of Seven finance ministers and central banks will assess in December how sustainable the current dollar strength is and whether the impact from high oil prices will be contained, a G7 source said yesterday.
The G7 officials meeting in London next month also think China should move towards a flexible exchange rate regime in the long term, but at this moment there is no pressing argument to pressure Beijing to revalue the yuan given low domestic inflation and dollar strength.
"The dollar is strengthening but it's not a problem in itself and the financial market is absorbing (the change). As long as it is an orderly adjustment, up or down, (there is no problem). The global economy is posting trend growth so FX moves are not having a big impact," the source said. "We are going to assess how sustainable this dollar strength is and also whether there is a risk of a dollar reversal."
The source added the economic fundamentals in the eurozone remained weak and that the weakness in the euro did not cause any discomfort to the European Central Bank.
The comments pushed the euro to session's low versus the dollar at $1.1673.
The dollar has risen more than 10 per cent against the euro this year, due to expectations for steady rises in US interest rates, reversing a sharp fall which pushed the greenback to a record low of $1.3667 per euro in December 2004. The global economy has proved resilient so far to the rising oil prices, which hit a record high above $70 a barrel earlier this year, before coming off below $60 recently.
"Since the last meeting in September basically there hasn't been a big change. Oil moves will be a topic but the financial impact from oil is contained so far. We will discuss whether this (contained second round effects) will continue to be the case," the source said.
At their last meeting in Washington in September, the group of rich nations welcomed the July 21 move by China to revalue the yuan by 2.1 per cent against the dollar.
"Everyone thinks China should move towards a flexible exchange rate regime in the long run. But at the moment the yuan's effective exchange rate is rising because of the dollar strength," the source said.
"Compared with the July level the yuan's effective exchange rate is up by a few percent against a basket of currencies. The real test comes when the dollar falls. At the moment there is no pressing argument for revaluation also as inflation in China is showing no sign of overheating and the economy is performing well."