G7: Yuan and Yen should rise

The G7 nations singled out China by urging it to let its currency
rise faster to help ease perilous imbalances in trade and backed a
rise in the yen to reflect Japan’s strengthening economic recovery.

"Greater exchange rate flexibility is desirable in emerging
economies with large current account surpluses, especially China, for
necessary adjustments to occur," the G7 said.

China has held the yuan artificially down to boost its exports. If
this call is taken heed by the financial markets on Monday, we could
see a sharp decline of the US dollar.

The Japanese yen was only mentioned in comments after the meeting
when ECB President Jean-Claude Trichet and German Finance Minister
Peer Steinbruecktold told reporters that the yen should rise in value
to reflect Japan’s economic recovery. Even Japan Finance Minister
Sadakazu Tanigaki joined in the club by saying the yen should reflect Japan’s
fundamentals.

China revalued the yuan by 2.1% in July 2005 and released it from
a decade-old dollar peg. Since then, the yuan has risen only another
2%.

Still, officials said the G7 was wary of applying too much
pressure on Beijing, fearing public criticism would backfire.

Chinese officials, who got a chance to make their case at a
working G7 lunch, had no immediate comment on the communique, but
earlier restated their aim to let the yuan trade more freely.

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