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OSAKA, Japan, Fri Jun 13, (bdnews24.com/Reuters) - The US dollar took centre stage as Group of Eight finance ministers gathered in Japan on Friday to wrestle with surging inflation and its impact on a slowing global economy. As soaring energy costs stirred protests from Malaysia to Spain, the world's most powerful governments talked up the link between dollar weakness and a doubling of oil prices in the past 12 months.
The US currency gained on Friday after French Economy Minister Christine Lagarde welcomed the dollar rebound of the past week, on signals that Washington was worried enough about its long decline to raise the prospect of intervening in markets.
Japanese Finance Minister Fukushiro Nukaga said he discussed currencies with US Treasury Secretary Henry Paulson, who refused last week to take intervention off the table. Nukaga declined to say if they had talked specifically about the dollar.
With central bankers absent, currencies had not been top of the agenda for the two-day meeting of G8 financial leaders in the Japanese city of Osaka.
Officials had said the talks would focus on commodities and inflation but Lagarde said the issues were inextricably tied to the dollar.
"The strengthening of the dollar I find satisfying," Lagarde said in Osaka, Dow Jones Newswires and other media reported.
"However, there is a cause/effect link between the stability of financial markets, the euro-dollar exchange and increasing prices of oil products."
The euro, headed for its worst week against the dollar in three years, briefly slipped to a day's low of $1.5421 on the remarks.
DOLLAR-OIL NEXUS
Oil prices have rallied in tandem with a slide in the dollar, which has lost nearly half its value against the euro in six years.
"defense of the dollar has become an urgent issue," Kyodo news agency quoted Japan's Financial Services Minister Yoshimi Watanabe as saying on Friday.
With investors increasingly using oil futures to hedge against dollar weakness, the Dallas Federal Reserve said in a paper last month the U.S. currency's slide had contributed about one-third of a $60 increase in oil prices between 2003 and 2007.
Italy will propose increasing the size of the deposit required to trade oil futures to make speculation more difficult, Economy Minister Giulio Tremonti told the Wall Street Journal.
"There's an enormous amount of attention from European ministers about the social impact of high prices," Tremonti was quoted as saying.
Anger over oil prices near a record $140 per barrel is spilling on to streets around the world. Trucker strikes turned violent in Spain, Malaysia beefed up security for an opposition rally on Friday and authorities from Thailand to the Netherlands are preparing for protests over rising pump prices.
Those prices are also percolating through the global economy, crimping growth, stoking inflation and dampening consumption. The Bank of France cut its second-quarter economic growth forecast by a third to 0.2 percent on Friday.
The Bank of Japan downgraded its view on exports and corporate profits on Friday over a slowing global economy and rising raw material costs.
Markets have long interpreted U.S. dollar policy as one of "benign neglect" -- speaking of the virtues of a stronger currency while profiting from its weakness through export growth.
Last week Federal Reserve Chairman Ben Bernanke flagged a change in Washington by linking the weaker dollar to inflation and saying that he was watching the currency closely with the Treasury. Paulson then refused to rule out intervention.
The last coordinated intervention among G8 states came in September 2000 when the Fed, European Central Bank and Bank of Japan acted to stem the euro's decline.
The G8 groups the United States, Japan, Britain, France, Italy, Germany, Canada and Russia.
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