After the Pittsburgh summit, we found out that the major group economic decisions by large industrialized nations will be made within the G20 framework. This deflated expectations for last weekend's G7 meeting in Istanbul. This smaller group may shrink further as the US has proposed a Seinfeld-like G4 of US, Japan, Europe, and China. Remember, one year ago the G7 issued an agenda to resolved the panic that was occurring in the financial markets.
At the meeting this year, there were the obligatory comments from Geithner that the US would do everything we can to sustain a strong, stable dollar including cutting the budget deficit after this crisis has passed. (So I'm confused, are we still in the crisis then?) Also, we had the new Japanese Fin Min Fujii say, "If currencies show some excessive moves in a biased direction, we will take action." From Canada, Bank of Canada Governor Mark Carney say that the central bank is "not closing off any options" on the Canadian dollar exchange rate in order to meet its inflation target according to MNI. Carney acknowledged that Canada's dollar (strength) is presently a major risk in meeting it.
Even still, the 2009 G7 Finance Ministers statement said, "We welcome China’s continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi in effective terms and help promote more balanced growth in China and in the world economy." the IMF has stated that the G7 urged China to allow their currency to strengthen. One official went as far to say that one day the Chinese yuan will rise and that the Istanbul meeting will be seen as the new Plaza Accord. Apparently, ambition was not killed off at these meetings.
ECB President Trichet said that the need to rebalance the global economy does not at all mean the US dollar should depreciate against the euro. But he did support what the IMF official said. "It is absolutely clear that a number of currencies have to progressively and orderly appreciate vis a vis both the dollar and the euro, but certainly not at all any change in the bilateral relationship," Trichet said. "If there is any qualification, it would certainly be that the other currencies, in particular currencies of the emerging world, should appreciate, or would appreciate, taking into account this strategy in the medium and longer term."
The spotlight on China and other EM countries will not force them to act however. China is not likely to go along with a stronger currency until they can feel confident their domestic demand will pick up the slack for the loss in exports that will come from a stronger currency. To stimulate stronger domestic demand, the Chinese government will need to get their savers to spend more. To do this, major changes need to take place to provide assistance for education, health care, and retirement to get savers to turn into spenders. This will take time.
In sum, the G7 finance ministers issue promises and threats on currencies with no collective action. They change nothing except their size. And maybe, that's the best thing we can hope for from them.