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Sunday, 11/21/2004 8:34:55 PM

Sunday, November 21, 2004 8:34:55 PM

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Snow: U.S. will reduce budget deficit
By CBS MarketWatch
Last Update: 2:27 PM ET Nov. 21, 2004

SAN FRANCISO (CBS.MW) -- U.S. Treasury Secretary John Snow pledged to reduce the nation's budget deficit Sunday, speaking at the conclusion of the Group of 20 economic summit in Berlin.

America's deficit has been blamed for the euro's gains over the dollar.

Snow said that the Bush administration was committed to cutting the deficit through spending caps and promoting pro-growth policies.

He also called upon the United States' trading partners to help reduce barriers to trade, such as instituting more flexible exchange rates.

Snow briefly discussed the just released G-20 Accord for Sustainable Growth, which calls for free trade and open markets worldwide, and he highlighted the importance of supporting international institutions to achieve economic growth.

"In recognition of the 60th anniversary of the Bretton Woods institutions, we discussed today the recent progress made in modernizing these institutions and the need for further reforms," he said.

Earlier in the summit, Beijing announced that it is not ready to loosen its currency peg to the U.S. dollar.

Gov. Zhou Xiaochuan, of the People's Bank of China, said Saturday that: "it is still not the stage to talk about a specific technical arrangement" in changing the exchange rate, which is about 8.3 yuan to the dollar.

"Now China is in the preparation stage," Zhou said. "We are prepared to follow financial institutional reforms to develop the financial markets, especially the foreign exchange market. ... We are reviewing our old foreign exchange control systems."

The People's Bank of China, the nation's central bank, has said reviewing its fixed exchange-rate mechanism was one of its priorities for 2004. It has faced international pressure in other venues, notably October's International Monetary Fund and G-7 meetings in Washington. See full story.

China has been trying to cool down its roaring economy to prevent a hard landing. Third-quarter gross domestic product grew 9.1 percent compared with the July-September period last year, slowing from the previous quarter's 9.6 percent and the first quarter's 9.8 percent, the country's Bureau of Statistics has reported. See analysis of dollar-yuan peg.

On the other side of the globe, President Bush was meeting with Pacific Rim leaders, and said in a meeting with Japan Prime Minister Junichiro Koizumi that he is committed to a strong dollar.

Koizumi said a solid dollar is important not just for the U.S., but for the world economy, as well.

The dollar touched a four-year low against the yen Friday and also sat at an all-time low against the euro. See full story.

Bush also met with Chinese President Hu Jintao at the Asia-Pacific Economic Cooperation summit in Santiago, Chile.

The president said the leaders plan to visit each others' countries and "did commit to make sure our relationship is healthy and strong.''

Bush also focused on the nuclear threat from North Korea and was meeting with leaders of South Korea and Russia.

Hu said after meeting with Bush that he hoped the "issue will be solved peacefully through dialogue." See preview of the meeting.

G-20 meeting

Currency talks at the Berlin summit could produce an informal statement Sunday from the G-20, the world's 20 largest established and emerging economies.

Ahead of that, a draft of the group's closing statement was expected to say oil prices are seen dropping to a range of $35 to $40. But the statement is expected to caution that oil producers are not likely to significantly raise output until 2010.

U.S., Japanese and European positions on their respective currencies have been made clear repeatedly as officials have let opinions and criticisms fly in the press over the past few weeks.

The dollar has had to bear the brunt of financial market concerns over a record U.S. current account deficit, a broad measure of trade that includes investments.

A falling dollar could help the United States reverse that deficit but likely only at the expense of still-fragile economic recoveries in Europe and Japan, officials have complained.

European Central Bank President Jean-Claude Trichet said Friday that he stands by comments made earlier this month, in which he said the euro's rise has been "brutal."

Still, a currency consensus "is too big of an issue for the G-20," said Jay Bryson, global economist with Wachovia Securities. "It will be saved for the G-7. Japanese officials have said as much."

German Finance Minister Hans Eichel also told a German newspaper that the G-20 is not the official forum for discussing exchange rates. U.S. Treasury Secretary John Snow uttered a similar sentiment while visiting Poland on Friday.

In a speech in Frankfurt on his way to attend the G-20 Friday, Federal Reserve Chairman Alan Greenspan roiled the currency market anew when he warned about the longer-term effects of the U.S. deficit. He did say there's not yet solid evidence that foreign investors have grown unwilling to finance the U.S. trade gap.

"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said to a conference on the euro.

The United States recorded a current account deficit of $166.2 billion in the second quarter. The shortfall has swelled to nearly 6 percent of U.S. GDP, its biggest share ever, which means the United States must continue to draw somewhere between $3 billion and $5 billion in working capital daily just to plug the gap.

Greenspan said it was impossible to know when, or at what level, the dollar would lose its luster among the global currencies.

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