The Dollar Adrift; Europe's increasingly desperate call for currency 'stability' will define the debate in Boca Raton.

Byline: Jeffrey E. Garten, Garten, dean of the Yale School of Management, held economic posts in the Nixon, Ford, Carter and Clinton administrations.

The seaside playground atmosphere of Boca Raton, Florida, will provide an ironic backdrop for this week's G7 summit of the seven major industrial nations, where the world's top finance ministers and central bankers will confront the most divisive issue in the world economy today: currency turbulence.

The war of words has been escalating in advance of the summit. In the past two years the dollar has fallen 40 percent against the euro and 24 percent against all major currencies. Though the Bush administration continues to publicly support a "strong dollar," it's clearly happy with a weaker one, which gives U.S. exports a competitive edge in an election year. Tokyo is openly worried about losing its edge, and has been buying dollars in huge amounts to slow their fall against the yen. Nowhere, however, is alarm as high as it is in Europe, where the euro is rising against both the dollar and the yen, and where top officials have used words like "brutal" to describe the impact of currency shifts on European companies. In recent days Europe's central bankers and finance ministers have issued calls for currency "stability," an apparently innocuous phrase that will be the lightning rod for behind-the-scenes debate in Boca Raton.

The drama will play out this week as U.S. Treasury officials, the summit hosts, send around a draft communique to the other six delegations. Most of the paper will be boilerplate, committing every country to pursue "sound policies"--which means, in plain English, to help correct the gross imbalances in a world economy that is now driven mainly by U.S. growth, and threatened mainly by U.S. debt. Washington will give lip service to cutting deficits, Europe will rehash its commitments to cut social spending and improve the climate for job creation and Japan will promise (again) to clean up its banking mess. But the real tussle will come over whether the communique emphasizes "stable" currency rates, as the Europeans and Japanese desperately want, or letting "market forces" determine exchange rates, as Washington prefers.

The release of the communique will be less important than how top officials spin the inevitably vague language in the hours that follow, says Daniel Tarullo, a law professor at Georgetown University and former special assistant, for international economic affairs, to President Clinton. Currency markets will jump on every word. If the word "stable" appears, does that mean that Washington has agreed to slow the dollar's descent? Does it mean that the European Central Bank will either intervene in the market or lower interest rates to slow the rise of the euro? If the term "market forces" appears, does it mean that Japan will stop artificially depressing the yen with massive market interventions? Will it mean a side deal was struck with China to loosen the peg of its currency to the falling dollar, which effectively makes already cheap Chinese exports even more competitive?

Whatever the summiteers say, no currency shift will last unless the G7 quickly backs up its words with action, warns Jeffrey Shafer, vice chairman for international investment banking at Citigroup and former undersecretary of the Treasury in the Clinton administration. This action could take one of two forms. Governments could intervene in foreign-exchange markets in a concerted fashion to buy or sell currencies to achieve a jointly agreed target value for the dollar. Or they could change interest rates to make their currencies more (in the case of the United States) or less (in the case of Europe and Japan) attractive to investors.

Most likely, the G7 will muddle through after Boca Raton. The conflicts may be relieved in part by changing circumstances. The strong U.S. recovery may draw foreign investors to the dollar and slow its ...