Will dollar be the world's sole reserve currency?
Posted: Fri Nov 12, 2010 4:03 pmDollar expected to withstand reform clamour [at Financial Times]
Thursday 11 November 2010
Almost everyone involved in the international financial system agrees long-term change is inevitable: the rise of China will surely mean that the dollar cannot continue to be the world's sole reserve currency.
This week's G20 summit seems unlikely to bring about big changes, however, and what replaces the dollar, when such a shift does happen, and whether the new arrangements will be co-operative or antagonistic is hard to predict.
Robert Zoellick, president of the World Bank, suggested this week that change may be needed sooner rather than later. He said gold, which this week passed $1,400 a troy ounce, reflected international unease at the strength of large developed economies and their currencies.
He proposed an international monetary system that would involve multiple reserve currencies with flexible exchange rates - including the dollar, the euro and a renminbi made more accessible to international investors - plus the use of the gold price as a "reference point" for currency movements.
Mr Zoellick said critics had misunderstood his proposal as a call for a return to the gold standard, the framework of fixed exchange rates backed by gold that was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.
"Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard," he said. "Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange.
"So, in relative terms, gold is appealing to people who ask, 'where should I put my money?' It is a hedge against uncertainty," he said. He also called on developed countries to adopt reforms to improve their growth prospects. That would make their currencies more attractive.
But multiple reserve currencies or greater use of gold are not the only long-term ideas for reform of the international system.
Another option is to expand the use of special drawing rights, created by the International Monetary Fund in 1969, and based on the value of a basket of euros, yen, sterling and dollars. A country can use an SDR to claim currencies from other IMF members in time of need - so they can be used as a reserve assets instead of dollars.
In 2009, Zhou Xiaochuan, the governor of the People's Bank of China, proposed the creation of a "super-sovereign reserve currency" that would be developed from SDRs. Under Mr Zhou's proposal, the basket of currencies underlying the SDR would expand, and a settlement system between SDRs and other currencies would be set up so they could be used in international trade and financial transactions.
At the time, Mr Zhou said the goal would be to create a reserve currency "that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies".
"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Mr Zhou noted.
But any attempt to reform the system now is likely to run up against tensions prompted by "currency wars" and accusations that China, the US or others are acting to weaken their own currency at the expense of others.
Whatever the system is based on, it would rely on all its members abiding by the rules of the game, which would be likely to mean that China had to expand demand at home and accept appreciation of its currency.
"Do I think this is a good time to reform the international financial system? The answer would have to be No," said John Williamson, senior fellow at the Peterson Institute for International Economics in Washington. "The real essential is to get a more collaborative regime," he said.
Mr Zoellick himself argued that a new monetary system needed to be co-operative. That, rather than the asset or currency it is based on may be the most essential point - and given the low expectations of the G20, the role of the dollar may not change for some time to come.
http://uk.finance.yahoo.com/news/dollar ... d0f1a.html
Thursday 11 November 2010
Almost everyone involved in the international financial system agrees long-term change is inevitable: the rise of China will surely mean that the dollar cannot continue to be the world's sole reserve currency.
This week's G20 summit seems unlikely to bring about big changes, however, and what replaces the dollar, when such a shift does happen, and whether the new arrangements will be co-operative or antagonistic is hard to predict.
Robert Zoellick, president of the World Bank, suggested this week that change may be needed sooner rather than later. He said gold, which this week passed $1,400 a troy ounce, reflected international unease at the strength of large developed economies and their currencies.
He proposed an international monetary system that would involve multiple reserve currencies with flexible exchange rates - including the dollar, the euro and a renminbi made more accessible to international investors - plus the use of the gold price as a "reference point" for currency movements.
Mr Zoellick said critics had misunderstood his proposal as a call for a return to the gold standard, the framework of fixed exchange rates backed by gold that was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.
"Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard," he said. "Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange.
"So, in relative terms, gold is appealing to people who ask, 'where should I put my money?' It is a hedge against uncertainty," he said. He also called on developed countries to adopt reforms to improve their growth prospects. That would make their currencies more attractive.
But multiple reserve currencies or greater use of gold are not the only long-term ideas for reform of the international system.
Another option is to expand the use of special drawing rights, created by the International Monetary Fund in 1969, and based on the value of a basket of euros, yen, sterling and dollars. A country can use an SDR to claim currencies from other IMF members in time of need - so they can be used as a reserve assets instead of dollars.
In 2009, Zhou Xiaochuan, the governor of the People's Bank of China, proposed the creation of a "super-sovereign reserve currency" that would be developed from SDRs. Under Mr Zhou's proposal, the basket of currencies underlying the SDR would expand, and a settlement system between SDRs and other currencies would be set up so they could be used in international trade and financial transactions.
At the time, Mr Zhou said the goal would be to create a reserve currency "that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies".
"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Mr Zhou noted.
But any attempt to reform the system now is likely to run up against tensions prompted by "currency wars" and accusations that China, the US or others are acting to weaken their own currency at the expense of others.
Whatever the system is based on, it would rely on all its members abiding by the rules of the game, which would be likely to mean that China had to expand demand at home and accept appreciation of its currency.
"Do I think this is a good time to reform the international financial system? The answer would have to be No," said John Williamson, senior fellow at the Peterson Institute for International Economics in Washington. "The real essential is to get a more collaborative regime," he said.
Mr Zoellick himself argued that a new monetary system needed to be co-operative. That, rather than the asset or currency it is based on may be the most essential point - and given the low expectations of the G20, the role of the dollar may not change for some time to come.
http://uk.finance.yahoo.com/news/dollar ... d0f1a.html