By Jan Strupczewski
BRUSSELS, Jan 30 (Reuters) - The euro zone wants the new U.S. administration to cooperate more on foreign exchange policy in the G7, sending a signal of unity that could help to reduce exchange rate volatility which his badly hurting firms, Eurogroup sources said.
Group of Seven finance ministers and central bankers will discuss foreign exchange issues in mid-February, including currency volatility, said the sources who are involved in preparations for the meeting in Rome.
"This will warrant a good discussion at the G7 because everyone is concerned about this -- about the volatility," said one source connected to the Eurogroup of euro zone finance ministers.
The former Bush administration favoured a hands-off approach to currencies, insisting markets should take the lead.
But citing hopes of a shift in stance under President Barack Obama, the source added: "There is one big change -- there will be a new U.S. treasury secretary (Timothy Geithner) and hopefully a new philosophy and a new approach to coordination."
"Our concern is to avoid strong fluctuations and to maintain calm on the foreign exchange market in a time of crisis," said a second euro zone source involved in meetings of the G7, which comprises the United States, Canada, Japan, France, Britain, Germany and Italy.
The euro has swung from $1.6038 in July to $1.2328 in October, $1.4436 in December and $1.2763 in January. Against the yen it went from around 170 yen to the euro in July to 113 yen in October, 131 yen in December and 112 yen in January.
Against the currency of the euro zone's biggest trading partner Britain, the euro firmed from 1.30 to the pound in October to 1.03 in December, fell back to 1.13 in mid-January only to firm to 1.05 and fall again to 1.09.
Exchange rate volatility would not be the main concern of the G7 during the recession in the United States and Europe, a global financial crisis and fears of deflation, but it still deserved attention, sources said.
"The fundamental problem now with foreign exchange is that companies that rely on those variables to determine their business strategy have absolutely now clue how to hedge their bets," the first source said.
A separate G7 source said last week that the group would tackle the fall in the value of the British pound at the Rome meeting.
The G7 has been saying for years that excessive exchange rate volatility was bad for economic growth. But markets have paid little attention, knowing there was no unity among G7 members on exchange rate levels and that the Bush administration strongly opposed any form of market intervention.
But with Obama's new U.S. government, the Rome G7 meeting could open a new chapter, sources said.
"More readiness to accept that coordination is the name of the game and that coordination is what the G7 should do, and not that the Americans tell the others what they will do and that the others should adjust accordingly," the first source said.
A signal of unity could help to calm markets. "If the right signals come from the G7, markets will pick up those signals and interpret them as they should be interpreted," the first source said.
Any intervention was unlikely, as there were no particular levels to defend or discourage at this stage. "I am not sure that's on the cards at the moment; there are indicators that are worrying policymakers more than the exchange rate," said the source.
But the very fact that there could be more cooperation between the U.S. and the euro zone could help reduce volatility, the sources said.
VOLATILITY TOUGH EVEN FOR G7
Geithner was a senior Treasury official during the Clinton era responsible for, among others, international exchange rate policy in the G7. It was on his watch that the G7 made a coordinated intervention to support the falling euro in 2000.
"He will strive to have more cooperation on economic issues than they did in previous years," a third source said.
"I see a large chance that more cooperation on economic policy between the U.S. and Europe would reduce the volatility on foreign exchange markets," the source said, pointing to more openness already signalled by Obama in foreign policy.
A European Central Bank study from last October said the key to G7 currency management was its credibility and ability to form and communicate a consensus view.
"This ability seems to have become somewhat weaker over the past decade as the overall degree of consensus in statements across G7 members in the weeks after G7 meetings has declined," said the study by the ECB's head of the International Policy Analysis Division, Marcel Fratzscher.
The study noted the G7 was had no success so far in fighting exchange rate volatility. "There is no evidence at all that G7 meetings have reduced volatility," Fratzscher said.
Economists said there was little the G7 could do, short of setting trading bands on currencies.
"Volatility reflects uncertainty of the world economy. As long as we have this kind of uncertainty, we will have this kind of volatility," said Gilles Moec, economist at Bank of America.
(Additional reporting by Anna Willard in Paris)
(Reporting by Jan Strupczewski, editing by David Stamp)