Alternative to the dollar? Not so fast

June 15, 2009

It’s hard to get away from the steady drumbeat of comments calling for diversification away from the dollar. On Tuesday, they’ll be plenty of opportunity for more as Brazil, Russia, India and China – the so-called BRIC nations – meet in Yekaterinburg, Russia for their first official summit. A top Kremlin official, however, said discussing a new reserve currency will not be on the agenda. Russia and China policy makers in particular have called for an alternative to the greenback, not surprising given their sizable holdings of dollar-denominated assets.

But like all things, setting up an alternative to the dollar will take time, and there’s no use talking down the U.S. dollar-denominated holdings before there’s something else to leap into.

Data released Monday from the U.S. Treasury showed just how dependent nations like China and Russia are on the fortunes of the dollar and U.S. debt.

China, as of April, still held $763.5 billion in U.S. Treasurys – making it far and away the biggest holder of government bond securities. While it’s down a smidgen – what’s $4.4 billion among friends – from the month before, it’s still up $20 billion from February. Russia, though further down the rankings, has $137 billion tucked away – again slightly down from the prior month but still up from February.

The short-term problem for all nations who invested their piles of currency reserves into safe havens like U.S. Treasurys and agency debt is how to pare back those investments as they seek to become less dependent on the ups and downs of the U.S. economy. Even if there were an alternative, big sales by major holders of U.S. government bonds would send the market into a tailspin – an unfortunate and likely a catastrophic development when the world is trying to emerge from worst global slump since the Depression.

But then, there’s still not much of an alternative. Even if nations wanted to diversify into other existing currencies rather than a brand new one, there are still no markets as deep and liquid as the U.S. debt markets. For better or worse, we’re in this together for a while.


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