Calls
grow to supplant dollar as global currency
France joins China, India and
Russia in calling for a new reserve standard on the eve of
the G8 summit By KARIM BARDEESY
- 00:00 EDT Monday, July 06, 2009
The
call to find an alternative to the U.S dollar as the global
reserve currency is gaining momentum as France joined calls
by China, India and Russia for a review of the world's currency
practices.
French Finance Minister Christine Lagarde
challenged the dollar's supremacy "in a world that has
changed because of the crisis and the growing role of emerging
countries."
The questioning of the U.S. dollar as the
key currency for central banks by a leader of a major European
economy gives renewed life to the issue at this week's Group
of Eight summit meeting in L'Aquila, Italy. The U.S. dollar
has long served as the dominant medium of exchange, and tends
to dominate the official money reserves that countries hold
through their governments and at their central banks.
In the first quarter of 2009, 65 per cent
of the world's allocated foreign exchange holdings were held
in U.S. dollars, according to the International Monetary Fund.
That's the highest in seven quarters.
The push for an alternative is being driven
in large part by concern over the weakened state of the U.S.
economy.
The country is forecasting fiscal deficits
for the next decade.
That's leading large holders of U.S. debt
such as China to worry that the U.S. dollar may not be as
safe as it once was. In addition, the dollar has been volatile
on international currency markets, and the U.S. is running
ongoing trade deficits.
Diversification would likely take years, because
unwinding large reserve positions of U.S. dollars too quickly
would devalue them. And despite concerns about the greenback,
it has maintained its international appeal, in part because
investors need the value of their U.S. dollar holdings to
stay high.
With the U.S. continuing to require willing
lenders to fund deficits, the situation has become what top
Barack Obama economic adviser Lawrence Summers once dubbed
"a kind of balance of financial terror."
That U.S. Treasury bills appreciated in the
immediate wake of the financial crisis was proof of the dollar's
strength, as "people fled to a stable place," said
Paul Wachtel, a professor at New York University.
Still, the risk of a move away from the greenback
is not without precedent, said Shaun Osborne, chief currency
strategist of TD Securities. "The U.S. is a bit complacent
about this. Most U.S. officials appear confident there will
be no quick switch away from the dollar. But we have seen
before, with the decline of the pound, that these things can
happen quickly, in the space of years."
Recent comments may be as much about politics
as economics.
Large developing countries are seeking a greater
role at the International Monetary Fund. China controls only
3.66 per cent of the votes at the body, despite being the
world's third-largest economy.
"A little bit of nationalism, a little
bit of searching for someone to blame for the economic crisis,"
Prof. Wachtel said. "Plus, it's a changing world: diversification
of reserves might make sense."
Canada and Japan both reaffirmed their support
for the greenback this week.
"It's an issue that we have not addressed,
other than to say that in the midst of what is still a significant
global recession, it's important that we aim for stability,"
Finance Minister Jim Flaherty said on Friday. "The stability
has been based on the U.S. dollar as the global currency."
Whether and how this will actually come up
at the G8 summit remains unclear. Russia is a G8 member, and
China and India are set to join the discussions on the second
day of the three-day meeting, but all are playing down the
prospect of formal talks just yet.
Chinese Vice-Foreign Minister He Yafei said
yesterday: "You may have heard comments, opinions from
academic circles about the idea of establishing a super sovereign
currency. This is all, I believe, now a discussion among academics.
It is not the position of the Chinese government."
The Chinese central bank, the world's largest
external holder of U.S. debt, reiterated its call for a new
international reserve currency in a policy review published
last week. It has proposed an International Monetary Fund-created
unit called Special Drawing Rights as an alternative reserve
currency.
Regardless of what happens at the G8 summit,
some analysts expect a diversification in large countries'
currency practices.
Alternatives like the euro, yen, Chinese yuan,
and Special Drawing Rights all have drawbacks, said Benjamin
Cohen of the University of California-Santa Barbara. "A
more fragmented currency system seems in the offing, with
much competition and no money clearly dominant," Prof.
Cohen said.