Europe wants Fed, China rate rises: G7 sources

(Reuters) - The U.S. Federal Reserve should raise interest rates to stem the slide in the value of the dollar and curb global inflationary pressure, European G7 sources have told Reuters, but concede they are unlikely to get their wish.

With the euro hitting record highs against the dollar and the European Central Bank raising interest rates to combat inflation, euro zone G7 officials are getting very frustrated with U.S. policy. There is no coordination, said the senior officials from monetary and economic policy circles.

They are also frustrated by China. European G7 officials said Beijing could do more to help the world financial system by raising rates, but is constrained by domestic politics.

The absence of action in the face of a year-old credit crunch, soaring inflation and stagnating growth has left many investors fearful that the world economy could slip into its most perilous state since the Great Depression of the 1930s.

G7 officials have told Reuters there have been regular discussions over the last few weeks to assess the latest leg in the financial market upheaval that started almost a year ago and shows no sign of ending.

But there has been little in the way of a joint plan to address the problems facing the world economy as G7 deputies prepare for meetings in Japan at the end of July.

"To curb global inflation the Fed should be raising interest rates, but on the other hand they have all the problems of the financial sector to worry about, and there is unlikely to be any interest rate hike before the U.S. election," said a G7 source.

"If the Fed raises rates or at least makes clear it is going to raise rates, that would help slow the Chinese economy too and probably bring down oil prices and put a ceiling on the euro."

The euro hit a record high above $1.60 last week as investors became increasingly nervous about the U.S. financial system. It has since come off but is still at levels strong enough to cause pain to Europe's exporters.  Continued...