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G8 frets over commodity shock

The world’s richest nations warned on Saturday soaring commodity prices may slice into economic growth, but shrank from offering any plan to calm markets or quell protests over the cost of fuel and food.

Currencies were not discussed in a meeting of G8 finance ministers in Osaka, Japan, after a string of tantalizing comments about a weak dollar’s role in inflation, and analysts said the currency would likely dip on Monday. An Italian push for regulation to snuff out speculation in oil futures ran into US and British resistance. Most ministers appeared more worried about slowing growth in economies hit by a credit crisis than about rising prices, just as most G8 central banks gird up to fight inflation. “Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable and may increase global inflationary pressure,” the ministers said in a communiqué.

Treasury Henry Paulson said costly oil could extend a US slowdown, the International Monetary Fund talked of prolonged global economic weakness and EU Economic Commissioner Joaquin Almunia warned of 1970s-style stagflation in an interview with a Japanese newspaper. The Group of Eight ministers acknowledged the difficulty of supporting growth after a US housing slump triggered a global credit crisis. The risk of record oil and food prices percolating into wages and other costs had made “policy choices more complicated,” they said. The ministers, preparing for a summit meeting of G8 leaders next month, had been meant to tackle threat of inflation from surging commodity prices, especially oil.

G8 countries, mostly importers of crude, wield little influence over oil markets that are driven by demand growth in India and China, and concerns about supplies. But they can try to arrest a slide in the US currency that has prompted investors to buy oil futures and other commodities to hedge dollar risks. The Italians pushed for rules that would make trading in oil futures more expensive to discourage speculation, drawing a cool response from the United States and Britain, home to big oil trading markets. “At its heart, this run up in price reflects long-term trends in global supply and demand and strong economic growth coinciding with a period of minimal investment in oil production,” Paulson said.

As a compromise, ministers asked the IMF to look into the drivers of oil’s rise towards records near $140 a barrel. “It is sometimes difficult to distinguish between an airline that may hedge its fuel price, which is perfectly sensible planning, and someone who is speculating or even gambling on the price of oil,” British finance Minister Alistair Darling said. Anger over oil prices has spilled on to streets around the world. Truckers’ strikes turned violent in Spain, Malaysians marched against the government and authorities from Thailand to the Netherlands face protests over pump prices. Producer and consumer countries will meet on June 22 in Saudi Arabia to discuss the jump in prices.

 
STRONG DOLLAR

The build up to the Osaka meeting had been dominated talks of a link between a dollar slide and a doubling of oil prices in the past 12 months. The Dallas Federal Reserve said in a paper last month the US currency’s slide had contributed about one-third of a $60 increase in oil prices between 2003 and 2007. French Economy Minister Christine Lagarde said dollar weakness and commodity price-inflation were inextricably linked. Paulson said on Saturday he disagreed, and stuck only to his oft repeated line that the United States supported a strong dollar. Markets have long interpreted US dollar policy as one of “benign neglect” -- speaking of the virtues of a strong currency while profiting through export growth from its weakness.

Last week Federal Reserve Chairman Ben Bernanke flagged a change 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, helping the US dollar post its biggest one-week gain against the euro in three years. The ministers did not discuss currencies or intervention at the meeting, Japanese Finance Minister Fukushiro Nukaga said, leaving analysts pondering a retreat by the dollar on Monday. “Some people may have expected stronger comments about inflation, and as part of that, concern about the dollar. The market may take profits from the dollar’s rise,” said Masafumi Yamamoto, chief currency strategist for Japan at Royal Bank of Scotland in Tokyo.

The G8 groups the United States, Japan, Britain, France, Italy, Germany, Canada and Russia. (Reuters)