* G7 keeps same old currency language in communique
* Geithner talks of strong dollar, but also rebalancing
* Flaherty accepts dollar under downward pressure
* No apparent progress in persuading China to boost yuan
By Andrew Torchia
ISTANBUL, Oct 4 (Reuters) - The Group of Seven's failure to break new ground on currency rates leaves the door open to more weakness of the dollar in coming months as the U.S. economy struggles with its trade and budget deficits.
Finance ministers and central bank chiefs of the G7 club of rich nations, meeting as a group for the first time in six months on Saturday, had a chance to address concern that a further dollar slide could hurt many countries' exports.
In the run-up to the meeting, there were heated discussions of the issue as some officials pressed for the group to send a signal to currency markets that it would not let the dollar enter a steep, extended decline, several G7 sources said.
But the G7 ended the meeting with no sign of a fresh commitment on currencies. Its communique merely recycled verbatim the language on exchange rates that appeared in its statement six months ago.
The G7 "is not going to interfere with the underlying U.S.
dollar bear trend," said Chris Turner, head of forex strategy
at ING in London, who expects the dollar to fall to $1.55
against the euro
SOLID DOLLAR
European and Canadian officials have expressed worry about the dollar. European Central Bank President Jean-Claude Trichet told the European Parliament last week that a strong dollar was "very important."
The euro has risen about 14 percent since March and is not far from its record high of $1.6038, hit in July 2008.
What worries policymakers is not so much the current level of exchange rates -- the euro zone's trade surplus ballooned to 12.6 billion euros in July -- but the risk the dollar could enter an uncontrollable downtrend if the U.S. central bank keeps interest rates too low for too long or if the U.S. government fails to reign in its swelling debt, G7 officials said.
The G7's communique in Istanbul, which simply repeated the same general warning on currency volatility that the group used when the euro was much lower, did little to ease this worry.
"Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate," the communique said. [ID:nFCC000036]
Under pressure from the Europeans, U.S. Treasury Secretary Timothy Geithner repeated that he wanted a strong dollar and would "do everything necessary to make sure that we sustain confidence." [ID:nL3403162]
But Geithner also talked of the need to shift to a more balanced model of global growth in which Americans saved more and other countries did not build up big export surpluses.
As the currency markets understand, by cutting the U.S. trade deficit, allowing the dollar to depreciate could be one of the most effective ways of achieving this global balance.
Canadian finance minister Jim Flaherty acknowledged the pressure on the dollar in an interview with Reuters after the G7 meeting. [ID:nL4521422]
"I'm accepting that the U.S. dollar is under downward pressure now and that will likely persist until the United States government addresses their deficit issue," he said.
CHINA
The dollar's prospects were also clouded in Istanbul by the
G7's apparent failure to make any progress in persuading China
to appreciate its tightly controlled yuan
By cutting the huge U.S. trade deficit with China, a stronger yuan could reduce pressure for the U.S. economy to rebalance itself through dollar depreciation against other currencies.
French Economy Minister Christine Lagarde referred to this prospect last week, saying it would not be fair if the euro "pays the bill" for an adjustment that should be taking place in the dollar/yuan exchange rate.
But China has kept the yuan almost flat against the dollar
since the financial crisis began worsening in July 2008, and
non-deliverable forwards
The G7 meeting showed no sign of breaking this deadlock; the communique merely repeated that currency reforms which China has pledged for years "should lead to continued appreciation" of the yuan at an unspecified time.
Yi Gang, a Chinese central bank vice governor who was in Istanbul for meetings of the International Monetary Fund, told Reuters that China would continue to emphasize yuan stability.
Asked about pressure on China to revalue the yuan, Yi replied: "We will continue our policy setting." [ID:nL3362369]
China is not a member of the G7, which comprises Britain, Canada, France, Germany, Italy, Japan and the United States. That in itself may limit the G7's ability to influence currency markets.
The larger Group of 20 nations, which includes rising powers such as China and India, has taken over management of the global economy during the crisis.
But the G20's communique after a summit of leaders in Pittsburgh last month contained only a vague reference to exchange rates and did not mention the yuan specifically, apparently because China felt the subject was sensitive. (Editing by Tim Ahmann)