The G-7 leaders last week agreed to talk about the fragile US$, but could not agree on what to do about it. The seven major industrial countries are counting on the ''sound underlying fundamentals'' of their economies to ease the pressure on the dollar.
How to face up to the weakness of the US$ in a volatile market, and the general economic uncertainty created by that weakness, has effectively been put off by the G-7 to another day - in fact, to another year; the 1995 summit at Halifax will start a review of the methods and institutions that bear upon currency fluctuations.
The question is, will a real currency crisis in the meantime make the decision to wait a full year a misguided exercise in buck-passing?
The early sell-off of the US$ yesterday showed that the currency market was not much impressed by the lack of resolution by the G-7. No doubt the volatility will continue; whether a protracted downturn ensues will depend in large part on the extent to which the market shares the leaders' belief in those ''sound fundamentals,'' and how much faith there is in the U.S.'s ability to hold down inflation.
This is where the game gets dicey, because even though the G-7 finance ministers acknowledged their concern over foreign exchange volatility, they agreed comfortably that the recent movements in exchange rates ''are not in line with the basic conditions prevailing in our economies.'' U.S. Treasury Secretary Lloyd Bentsen hardly added to the markets' confidence by his comment that he has ''quit trying to anticipate what's going to happen insofar as the currency markets are concerned.''
Bentsen and the others may be frustrated by the markets but they should be addressing the points of concern - particularly large budget deficits - rather than appearing bewildered by what is going on.
Furthermore, in this the 50th anniversary year of the Bretton Woods conference that established the postwar monetary system, the G-7 leaders should have addressed directly how to deal with the gyrations in the US$, the world's major reserve-currency.
Volatile exchange rates may please traders, but they are anathema to business planning and long-term stable growth. In the floating-rate system we have, one way to establish more stability may be to have the three major currency countries, the U.S., Japan and Germany, agree to suitable exchange-rate levels based on those ''underlying economic fundamentals'' and move in concert to support those levels when they are threatened.
It's true that the recent central bank interventions on behalf of the US$ didn't prevent its decline, but there is something to be said for an advance commitment to support at certain levels. No doubt the market would test that commitment, and there would be difficulties in getting national support for such an international agreement. But a more stable exchange market within the present floating regime would benefit international business as a whole.
Rather than wait for Halifax next year, the G-7 ought to start now to try to establish more exchange-rate stability.
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Revised: June 3, 1995
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