ISTANBUL/GOTHENBURG - The Group of Seven rich nations is expected to issue its customary call for stable exchange rates on Saturday, but do nothing more specific to address concern a weak dollar could hurt European exports.

With the G7 increasingly eclipsed in global policy-making by the Group of 20 countries, which includes big developing economies such as China and India, there was debate among officials earlier this week over whether the G7 would issue any communique at all after its meeting in Istanbul on Saturday.

Canadian Finance Minister Jim Flaherty said a short communique was likely.

If we have substantive discussions, and I imagine we will, then I would expect some sort of brief communique, Flaherty told reporters.

G7 sources said on Friday a communique would be issued, partly because it was important to have a joint statement to avoid confusion and avert the risk of individual countries implying agreement on policies when there had been none.

One source said the communique's language on currencies was not expected to differ from that used in April, when finance ministers and central bankers from the G7 last met.

You should not be looking for any shift, the source told Reuters.

The April statement read: 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.

EURO
That bland language could disappoint European officials, particularly those from France who have expressed concern in recent days that the euro's strength against the dollar could damage Europe's economic recovery by stifling exports. The euro is up about 16 percent since March.

It is out of the question that the euro pays the bill for an adjustment between the dollar and the (Chinese) yuan, French Economy Minister Christine Lagarde said on Thursday.

Canada's Flaherty reminded his European counterparts that they were not unique and that countries like Australia and Canada were also hurting from the weak U.S. dollar.

The G7 meeting takes place as officials gather for a semi-annual meeting of the International Monetary Fund, whose top officials have made it clear they think there is little room to accommodate European worries about euro strength.

What we find today among the major traded currencies is that, in broad multilateral, effective terms, inflation-adjusted terms, for the major traded currencies there does not appear to be a problem in restoring and sustaining growth, First Deputy Managing Director John Lipsky told Reuters television on Friday.

U.S. Treasury Secretary Timothy Geithner on Thursday repeated that a strong dollar was very important to the United States -- a statement European officials had been pressing him to make.

But since U.S. officials have continued to make that statement even during great dollar weakness, it is only of minor value in allaying fears of further euro strength.

CHINA

The G7 source said it was not clear how China would be mentioned in Saturday's G7 communique.
The G7's statement in April said, We welcome China's continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi in effective terms and help promote more balanced growth in China and in the world economy.

However, pressuring China in this way to let its currency strengthen may be ineffective because of China's key role in the increasingly powerful G20. China is not in the G7, which comprises the United States, Japan, Germany, France, Britain, Italy and Canada.

Flaherty said the G20 was an appropriate forum for currency discussions for that reason, without excluding a role for the

G7.

But Bank of Japan Governor Masaaki Shirakawa said it was easier to discuss currencies among the exclusive G7.

Compared with the G20, the G7 consists of members that have major financial markets. That's why it's easier for the G7 to be a forum for discussing the foreign exchange market, Shirakawa told reporters on Friday.

He said the G7 would discuss the financial and economic conditions behind recent foreign exchange movements.

IMF chief Dominique Strauss-Kahn repeated on Friday that the IMF believed the Chinese yuan, which is closely controlled by Beijing, was undervalued.

(Additional reporting by Anna Willard in Sweden, Louise Egan and Leika Kihara in Istanbul, Editing by Chizu Nomiyama)

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