The dollar looks set to stay weak

The meeting of finance ministers from the Group of Seven had condemned "excess volatility" in exchange rates.

The warning was a dig at the way US authorities have encouraged the dollar's slide, at first underpinning a rally for the greenback.

But the gain vanished to put the dollar at an 11-year low against the pound.

The dollar did recover slightly towards the end of trading in New York, trimming its losses against both the euro and yen.

Analysts, however, said there was little to suggest that the currency's long-term direction was about to reverse.

Downward trend

The dollar has sunk rapidly against the yen, the pound and the euro in recent months, in the face of apparent tacit US sanction of its decline.

A call in September's G7 communique for "more flexibility" in exchange rates also encouraged the movement.

The weight of massive US trade and government deficits has added to the downward pressure, along with the persistence of rock-bottom US interest rates.

The trend has worried policy-makers elsewhere, who fear their own fragile economic recoveries could be damaged if their exports are priced out of the lucrative US market.

Thus the weekend statement, which coupled the needs of Europe and Japan with a reiteration of the "flexibility" demand.

The latter, observers believe, was targeted at China, which the US blames for keeping its exchange rate artificially low and in turn hurting US exports.

A Chinese paper speculated the government in Beijing would revalue the yuan this year, but the government said the report was untrue.

Lip service?

But even though the G7 statement is apparently trying to set a floor under the dollar's decline, traders seem to have written it off as little more than lip service.

"The G7 statement was not strong enough to hint they were prepared to consider intervention at this time," said Kamal Sharma of Dresdner Kleinwort Wasserstein in London.

The statement was "a compromise between the US and Europe", he pointed out.

"There appears to be a stalemate, and in this condition the natural trends... will take over."

The imminence of a US election in November could also be a factor, with a weak dollar enhancing US exports and therefore perhaps catalysing a growth in employment.