Bush's Dollar Drop Maps Loss of U.S. Clout at Final G-8 Summit

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By James G. Neuger

July 3 (Bloomberg) -- When President George W. Bush went to his first Group of Eight summit in 2001, a dominant issue was the dollar -- the strong dollar, that is. The U.S. currency was on a record-setting streak, and the free-marketeering president wasn't going to stand in the way.

On the eve of Bush's last G-8 appearance, the dollar's gyrations are again in the crossfire. This time, it is a weak currency, upended by slumping growth, a housing recession and record gas prices, that is gnawing away at the world economy.

The dollar's 41 percent drop against the euro during Bush's term writes the economic epitaph of an administration that set out to restore American preeminence. Instead, Bush heads to Japan next week for his final international summit with diminished leverage as Russian and Chinese influence grows.

"Between the economic duress facing the United States and the global community at large and the fact that the clock is running out on the Bush administration, Bush does not hold a good hand," said Charles Kupchan, an international-relations professor at Georgetown University in Washington. He called the summit a "damage-limitation" exercise to show the world that governments are trying to contain food and oil prices.

Global economic-confidence building crowds the agenda at the three-day summit starting July 7 in Toyako, on the northern Japanese island of Hokkaido, that was meant to tackle climate change, recommit the rich world to development aid for Africa and strengthen nuclear non-proliferation controls.

Growth Lags
Bush represents the worst-performing economy in the G-8 after Italy, with growth of 0.5 percent this year set to lag behind 1.6 percent in the U.K., 1.4 percent in the euro area, 1.4 percent in Japan and 1.3 percent in Canada, according to International Monetary Fund forecasts.

Russia, brought into the G-8 by Bill Clinton in 1998, will eclipse the rest of the club with growth of 6.8 percent this year, the IMF says. Russia's oil and commodity wealth puts it at odds with the western goal of cutting reliance on fossil fuels. China, seen expanding 9.3 percent, has also frustrated the fight against global warming by locking up energy deals in Africa to slake its economic thirst. China will be among eight non-G-8 members that take part on the summit's last day.

America's economic woes with $4-a-gallon gasoline prices will stiffen Bush's opposition to European and Japanese calls for binding, quantifiable targets for cutting greenhouse-gas emissions, blamed by scientists for pushing up global temperatures.

Global Warming
Bush took a baby step at last year's G-8 by acknowledging the need to do something about global warming, edging the U.S. away from the laissez-faire approach that he championed after pulling the U.S. out of the Kyoto climate-protection protocol in a move that met international condemnation in 2001.

With the countdown under way to the presidency of Barack Obama or John McCain, the most the summit can do is set up a framework for pollution-cutting agreements that replace Kyoto when it expires in 2012, said Reginald Dale, a senior fellow at the Center for Strategic and International Studies in Washington.

"Most of Bush's partners are looking to the next president," Dale said. European leaders will "be trying to pin Bush further down on the nature of commitments that the United States might undertake to reduce emissions in the shorter term."

Europe's Bind
Europe is caught in a bind of its own. Soaring fuel prices and a chorus of protests put pressure on leaders to offer relief instead of weaning consumers away from fossil fuels. French President Nicolas Sarkozy, holder of the 27-nation European Union's six-month presidency, is pressing for fuel-tax cuts.

Oil prices continued climbing after pressure by European leaders including Britain's Gordon Brown led Saudi Arabia, the world's biggest oil exporter, to announce for July the third straight monthly increase in production.

"There's no hope for new achievements or concrete results regarding crude-oil prices or the shortage of food or global warming," said Koichi Kato, a senior member of Japan's ruling Liberal Democratic Party.

Spiraling food and fuel costs are hitting poorer countries the hardest, increasing the pressure on the G-8 to make good on a 2005 pledge to double development aid to Africa to $50 billion annually by 2010 and to implement last year's promise to invest $60 billion worldwide to combat deadly diseases.

Price Surge
G-8 finance ministers last month identified surging commodities prices as a bigger threat than the credit squeeze to the world economy. Prices for 19 commodities in the Reuters/Jefferies CRB Index rose 29 percent in the first half, the most since 1973. Rice, corn and wheat futures have all touched records this year.

Sagging faith in the dollar -- it now makes up 63 percent of global currency reserves, down from 71 percent when Bush took office -- complicates efforts to tame commodity prices because they are primarily denominated in the U.S. currency.

America's dependence on imported capital to finance a $9.5 trillion debt -- up from $5.7 trillion when Bush took office -- has driven down the currency. The decline was accelerated by the subprime crisis that plunged the U.S. into an economic tailspin.

"If Bush could get others at the G-8 summit to demand a stronger dollar he'd have done a final good after a lot of negatives over the years," said Uwe von Parpart, chief Asia strategist at Cantor Fitzgerald LP in Hong Kong. "Dollar strengthening appears to be the only thing capable of containing or pushing back oil prices."

Speaking at the White House yesterday, Bush tried to give the markets a nudge: "We're strong dollar people in this administration and have always been for the strong dollar."