June 2 (Bloomberg) -- The Group of Eight industrial countries closed ranks in voicing concern about the dollar's recent declines, as U.S. President George W. Bush reassured fellow leaders by saying he favors a strong dollar.

The dollar has shed 20 percent against Europe's single currency, 10 percent against the Canadian dollar and 4 percent against the Japanese yen in the past year, sapping export orders and crimping economic growth in all three regions. Today, the U.S. currency rose to a seven-day high against the euro and strengthened against the Canadian dollar.

``Bush affirmed very clearly that he wants a strong dollar,'' Italian Prime Minister Silvio Berlusconi said in Evian, France, the venue of this year's G-8 talks. ``He was very clear about the fact that the U.S. economy can expand only if the economies of Japan, Europe and Russia are growing.''

The world's richest countries are all struggling to get their economies out of a two-year slump. Until now, the U.S. is benefiting from a falling dollar, with exports at the highest level since September 2001 in March. As currencies rise elsewhere, the risk for the U.S. -- and the world economy -- is that demand in some of its biggest markets will decline.

``The U.S. is now talking the dollar up,'' said Kenneth Courtis, vice chairman in Asia of Goldman Sachs Group Inc. and an adviser to Canadian Prime Minister Jean Chretien at last year's G- 8. ``If the dollar really goes too far it's going to cause so much trouble for the yen and euro that it's going to hurt growth in those countries more than it's going to help U.S. exports.''

`Consensual'

France, which holds the G-8's presidency this year, is hosting the three-day summit with the leaders of the U.S., Germany, Japan, the U.K., Canada, Italy and Russia for talks on the world economy, development and foreign affairs.

Exchange rates ``are very important for the growth of the world economy,'' said Catherine Colonna, the spokeswoman for French President Jacques Chirac. ``There was a consensual approach.''

Until Bush's comments, opposing views on the dollar's decline threatened to add to differences between the G-8 nations on issues as wide-ranging as the rebuilding of Iraq, the sale of genetically- modified food and subsidies on agricultural products.

The dollar strengthened to $1.1748 per euro at 18:07 p.m. in Evian from $1.1784 late Friday and advanced against seven of the 15 other most frequently traded currencies, including the Canadian dollar. The U.S. currency fell to 118.57 yen, from 119.30 Friday.

Brink of Recession

The euro region, where exports make up a fifth of the economy, is on the brink of recession after the German economy shrank in the first three months of the year. Growth in Japan, which has been mired in a 12-year slump, has slowed for the past three quarters. The Canadian economy didn't grow at all in March as exports -- worth about 40 percent of GDP -- slumped.

Europe, Japan and Canada buy more than half of U.S. exports, a proportion the U.S. cannot ignore, analysts said.

``The U.S. wants a weaker dollar, but does not want to see a dollar crash,'' said Stephen Jen, chief currency analyst at Morgan Stanley, which has about 4 percent of the global currency market. ``This means that the U.S. cannot be crystal clear on the dollar policy, and will need to remain constructively ambiguous on its intentions.''

A weaker dollar has not only helped export orders in the U.S., it has also assuaged concern by Federal Reserve Chairman Alan Greenspan, who repeated in last week's testimony to Congress that the U.S. still faced a ``minor'' risk of deflation, a broad- based decline in prices.

The core rate of inflation -- price rises minus food and energy -- eased to 1.5 percent in April, the smallest gain since 1966. Prices of manufactured goods have actually been falling. A weaker dollar helps boosting the price level as imports become relatively more expensive.

Yen Sales

Deflation is an even more pressing concern in Japan and Germany. Japanese consumer prices haven't risen since April 1998 and inflation in Germany slumped to a 3 1/2 year low to 0.7 percent in April. With inflation indexes overstating price growth by about 1 percentage point, deflation may already be a reality in Germany, Morgan Stanley's Jen said.

``In a deflationary environment, it's every man for himself, said Jen, who used to work for the Federal Reserve in Washington DC. ``In a synchronised recession, no country in its right mind would allow their currency to rally hard against the dollar.''

Japan's government has taken repeated action to stem the yen's rise against the dollar. The Bank of Japan sold a record $33.4 billion worth of yen in May after it reached a 2 year high. Prime Minister Junichiro Koizumi said today that the yen should be weaker and welcomed Bush's comments on the dollar.

Rate Cut Calls

European leaders refrained from suggesting that central banks should intervene in exchange rate markets by buying or selling currencies. At the G-8 meeting, leaders didn't talk about buying or selling currencies to influence exchange rates, Germany's Deputy Economics Minister Alfred Tacke said.

``Intervention is not an instrument'' to realign currencies, Tacke told reporters.

Instead, European leaders from France's Chirac to German Chancellor Gerhard Schroeder have focussed in recent weeks on calling on the European Central Bank to lower interest rates. The bank is expected to cut rates by half a point Thursday, another reason why the euro may fall in coming days.

Even after the show of unity of G-8 leaders on currencies, the dollar's decline may well resume, analysts say. Philippe Waechter, chief economist at Banque Populaire Asset Management in Paris, which oversees $61 billion in stocks and bonds, predicts the euro will rise to at least $1.25 by the end of the year.

``There is now some confusion in markets; you might even see a temporary stabilization or rise,'' Waechter said. ``But that will be short-lived -- the fundamentals haven't changed.''

Last Updated: June 2, 2003 12:26 EDT