By Jamie McGeever

ORLANDO FL (Reuters) – U.S. Treasury Secret Janet Yellen is yet to make any comments on the dollar’s exchange rate, although she might soon.

This week, she will be meeting other Group of Seven central bankers and finance ministers in Bonn against one of most difficult global economic backgrounds in decades. At the core of this is the seemingly invincible U.S. Dollar.

The yen is at its strongest since 2000 when it’s compared to major currencies. Japanese officials were unhappy with the weakening yen and euro zone officials are now questioning the inflationary effect of the euro, which is approaching a 20 year trough and parity to the dollar.

Francois Villeroy De Galhau, Bank of France Governor, stated this week that the European Central Bank would “carefully monitor” changes in exchange rates. He added: “A euro too weak would be against our price stability goal.”

(GRAPHIC- Dollar index & euro since euro launch: https://fingfx.thomsonreuters.com/gfx/mkt/byvrjdlmgve/DXYEuro.jpg)

Yellen can be content with a higher exchange rate – this helps to dampen the effect of import prices inflation. This is the biggest issue facing consumers, businesses, and policymakers.

Treasury adheres to the 1995 policy of Treasury Secretary Robert Rubin. He declared that strong dollars were in America’s national interests and this phrase was a constant for his successors over many years.

Although the policy does not refer to specific levels of currency strength, it was intended to discourage markets from speculation about government biases towards weakening trade-enhancing currencies and to keep U.S. inflation expectations and bond yields under control.

Trump used all of that to his advantage in his shift toward protectionism. He often supported a weaker dollar. Steve Mnuchin, his Treasury Secretary, also supported a weaker currency before being made to resign.

Yellen is, naturally, from the Democratic side. Despite her replacement of Mnuchin, Yellen has not raised the exchange rate issue.

At the Senate confirmation hearing, she stated she was a firm believer in exchange rates determined by market forces and she did not accept targeting weaker currencies to achieve commercial advantages.

This was repeated by her during the Wall Street Journal webcast. She added that the rise in U.S. interest rate relative to the rest of world has helped drive the dollar’s growth.

“In some ways, that is how tighter monetary policy works,” she stated, suggesting that she had been comfortable with the dollar’s appreciation until then.

(GRAPHIC- Major central bank policy rates: https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwekxmpo/G4RATES.jpg)

TWO-WAY RISK

If the answer is simple, then Yellen or her G7 colleagues may assume that a reversal at these interest rate gaps will ultimately cool the dollar.

Some may feel compelled to make a statement about any dollar overshoots that might cause further anxiety on global markets.

Analysts Barclays Goldman Sachs (NYSE) and LON: Goldman Sachs (NYSE) both believe the dollar is on the verge of topping. Goldman says the dollar has an 18% excess value, but is cautious about calling for a reverse.

Although the ECB may have a shorter window for raising rates than the Federal Reserve, the Bank of Japan has not given up on its goal of maintaining a loose monetary policy that would keep the yield of the 10-year bond at 0.25%.

Steven Englander is the head of FX strategy for Standard Chartered (OTC) and a veteran G7 monitor. He notes that Japan’s monetary policy is completely consistent with a strong yen. That reduces the likelihood of a Tokyo protest against USD strength being accepted into the Bonn communiqué.

Any mention of intervention would serve to make investors less cautious about buying one-way dollars. Englander stated that any intervention mentioned is an attempt to make investors more cautious about buying one-way dollars. However, they have not yet taken a serious shot at intervention.

In 1985, the G5’s Plaza Accord was the last coordinated effort by the leading industrialized countries to reduce dollar strength.

(GRAPHIC- Dollar index since 1971: https://fingfx.thomsonreuters.com/gfx/mkt/jnvwezyjovw/USDindex.jpg)

It is easy to see parallels between the current mixture of U.S. high inflation and a Fed that is hawkish and divergent policies among world’s major central banks.

The G7 host is what sets the agenda. If French officials already make noises about euro, it’s safe to assume that Germany is more concerned about weakening the currency and the inflationary pressures associated with it.

Joe Lavorgna is the chief economist for Americas at Natixis, and a former advisor to President Trump. She doubts that Yellen would want to deal with the matter if it’s possible, but she doesn’t rule out the possibility in the immediate future.

“The Administration won’t accept a weaker currency, at least not right now. The U.S. would prefer tighter financial conditions to a weaker dollar. He said that if there is an excess of the dollar in summer, and then stagflation within the euro area, it could change the calculation.

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(These opinions are the views of the columnist at Reuters.

(By Jamie McGeever. Editing by Tomasz Jaowski. Graphics by Saikat Chatterjee. Joice Alves. Saqib Ahmad.