Paulson, Lagarde, Kudrin Support `Strong' Dollar at G-8 Talks

By Sandrine Rastello and John Brinsley

June 14 (Bloomberg) -- Finance chiefs from the world's richest nations spoke out in favor of a strong dollar after the U.S. currency rose the most against the euro in three years.

``A strong dollar is in our nation's interest,'' U.S. Treasury Secretary Henry Paulson told reporters after meeting counterparts from the Group of Eight nations in Osaka, Japan today. French Finance Minister Christine Lagarde said she was ``happy to hear Paulson clearly say how much the strong dollar policy is indispensable.''

The dollar this week rose 2.6 percent to $1.5376 per euro, its largest weekly gain since 2005, yet is still 5 percent weaker than at the start of the year. The ministers maintained their practice of not including mention of exchange rates in their joint statement when central bankers aren't present at the talks.

Officials including Lagarde and Russian Finance Minister Alexei Kudrin said a higher dollar would help tame accelerating inflation, which the G-8 identified as their chief concern. Most raw materials are priced in the U.S. currency, providing investors with a hedge against its decline that partly explains the rise of fuel and food costs to records this year.

``The weaker dollar is one of the major reasons for the oil price spike,'' Kudrin told reporters in Osaka. Asked if a strengthening in the dollar would cool commodity prices, he said: ``Of course.''

Supply, Demand

Paulson downplayed the link, noting that since 2002 the U.S. currency has declined by about a third, while oil prices soared more than 500 percent.

``All evidence'' points to differences between supply and demand as the main reason for commodity price increases, he said.

Having previously signaled indifference toward the dollar's drop as it encouraged exports, U.S. officials this month sought to prop it up on concern a weaker currency risks fanning inflation by making imports more expensive.

Federal Reserve Chairman Ben S. Bernanke said on June 2 that the central bank is ``attentive'' to the currency's value, a day after Paulson said he ``very strongly'' favors a ``strong dollar.''

``We've got strong long-term fundamentals,'' Paulson said today. ``These fundamentals will be reflected in our currency.''

Policy makers' support for the dollar may still fail to buoy it. Japanese Finance Minister Fukushiro Nukaga said there was no discussion of intervention at the G-8 meeting.

Meantime, European Central Bank officials say they may raise their key interest rate a quarter point to 4.25 percent in July. That would make it more profitable to hold euros than dollars even as the Fed is forecast to leave its main rate at 2 percent this month after cutting it seven times since September.

Separately, International Monetary Fund Managing Director Dominique Strauss-Kahn urged China to let its ``undervalued'' currency strengthen to fight inflation in an interview in Osaka.

To contact the reporter on this story: Sandrine Rastello in Osaka, Japan, at srastello@bloomberg.net.