G8 signals end to dollar supremacy

July 3, 2009

john_kemp- John Kemp is a Reuters columnist. The views expressed are his own. -

Reports that China has asked for a discussion about reserve currencies at next week’s expanded Group of Eight summit in Italy has added to confusion about whether the country wants to dethrone the dollar from its status as the world’s sole reserve currency. But the very fact the issue has been pushed onto the agenda suggests that a fundamental shift is underway.

Given the U.S. government’s enormous borrowing requirements over the next decade to cover the bank bailout, fiscal stimulus and deficits in Social Security and Medicare, the dollar’s reserve status depends on emerging markets’ continued willingness to accumulate U.S. liabilities rather than switching to other stores of value, such as the euro or the IMF’s Special Drawing Right (SDR).

As the largest buyer of U.S. Treasury securities, China can break the dollar’s reserve currency status any time it wants. But it would risk large losses on the stock of U.S. debt that it has bought already. The resulting unstable stability is the foreign exchange version of the Cold War stalemate based on “mutually assured destruction”.

Senior Chinese officials have given off mixed signals about their intentions.

When pressed, officials have indicated China will continue to stand by the dollar in the short term and denied the country has begun to diversify its official holdings. But that has not stopped People’s Bank of China (PBOC) Governor Zhou Xiaochuan floating the idea of shifting to a super-sovereign currency based around the SDR.

Zhou’s call for diversification was repeated last week in the central bank’s annual stability report, which noted that “an international monetary system dominated by a single sovereign currency has intensified the concentration of risk and spread of the crisis”. It went on to urge the IMF to exercise closer supervision of the economic and financial policies of major reserve-issuing countries.

Chinese officials have bluntly expressed concern about U.S. fiscal and monetary policies that appear to contemplate inflation and devaluation as a way out of the debt crisis, or at least accept it with weary resignation.

China has started backing a variety of small projects designed to encourage greater “internationalisation” of its currency (such as an active RMB market in Hong Kong and bilateral discussions with Latin American countries on the use of RMB to settle trade transactions).

The question is whether China is preparing to deliver the “coup de grace”.

Pressing for a reserve currency discussion at the expanded G8 summit (which will also be attended by India, Brazil, Mexico, South Africa and Egypt) suggests China’s leaders are serious. They must have known that just pushing the issue onto the agenda would rekindle market fears about the dollar’s value.

But it could also be an attempt to create leverage and seize the initiative as part of wider efforts to shape the international financial agenda.

In the past, G8 summits have been structured as a monologue from the advanced industrial economies to the developing world. But following the debt crisis, the leading emerging markets are in no mood to be lectured.

By putting the dollar into play, China’s government may hope to pre-empt pressure from western countries for a revaluation of the RMB, and take exchange rate discussions off the table entirely.
It is also a sign China is ready to begin flexing its financial muscle and will have to be treated as an equal alongside the United States, EU and Japan, shaping as much as responding to the policy debate.

The dollar’s reserve status has become highly conditional, one of a number of items to be bargained over as part of the international financial agenda. Past experience suggests that when reserve currencies become highly contingent in this way, it marks the beginning of the end.

The dollar will not lose its reserve status completely. But it is set to become less “special”. In future it will have to share its reserve status with the euro, the yen and perhaps even in time the yuan.

Comments

This article is absurd,and I am an european.

Do you have any notion of the fact that 77% of the world deals in dollars,and 20+% Euro,Yuan is less the .002% .

This is major communist propaganda, to destabilize the world, even Chineze people use dollar and euro.

Posted by Ian | Report as abusive
 

Nothing is impossible. When people talk of going to the moon as absurd, we did it anyway. THe “reserve” status comes with a responsibility and this the Americans have not upheld. Can’t blame why the push for the shift. This idea may be in the minds of many others but who has the “voice and muscle” and the guts to make it heard. We all know the answer.

Posted by Benny | Report as abusive
 

The Federal Reserve was created to preserve the value of the dollar. However since 1913 the dollar has lost more than 90% of its value. Unless the trend changes the dollar will at some point be worth less than toilet paper. AUDIT THE FED then END IT.

Posted by A. Fisher | Report as abusive
 

Times are rapidly changing, Ian. US $ is and won’t no longer be the sole currency of reference, which is a very, very good thing. This is and will be a multipolar world (or whatever remains of it)

Posted by W. Stucchi | Report as abusive
 

The World as well as American Citizens have lost respect in the financial dealings of Washington and the Federal Reserve. Stop deficit spending, Audit then dump the Fed. Washington, please come back to honest dealings as per the Constitution?

Posted by ginsengjohn | Report as abusive
 

I think the article is insightful and it’s proposition a valid one. Ultimately I would expect a move toward a universal reserve currency (SDR?) which would be much less prone to the political naivety and gerrymandering of, particularly, the past two decades. The idea of continuing as an ever increasing debtor nation is unsustainable and whatever happens to the status of the dollar will need to take that into account.

Posted by Dum | Report as abusive
 

Old news. The FX market has known for years that the world’s central banks have been quietly bidding for EUROs and offering USD in an attempt to realign their FX holdings. Mr. Bush’s ill-advised wars and Mr. Obama’s foolish spending spree have merely accelerated the process.

Posted by Gotthardbahn | Report as abusive
 

Ginsengjohn, how does one bring a den of liars and thieves to know the virtue of integrity? Otherwise I agree.

Posted by Anubis | Report as abusive
 

Like to add an other point to the whole reserve currency discussion one that has been grossly underestimated and deserves more media attention. What about the amount of trade done whitout any money! Iran traded oil for Thai rice for instance. A very large, very underestimated proportion of world trade is done this way. Countries who have this possibility and don’t want to stick their necks into the “dollar guillotine” are going to increase this way of trading.

Posted by Youri Carma | Report as abusive
 

When will the U.S. Dollar be replaced by some other currency? ANSWER: “When hell freezes over.” Remember when the Euro was supposed to be the end-all and cure-all for the European Union? Well, guess what! There is growing dissatisfaction among several E.U. nations, with some considering going back to their original economic ways and currencies.

Posted by Van | Report as abusive
 

The dollar will be replaced soon.

Van have been watching to much fox news. the euro countries dont want to return to their currencys.
we are mutch better like this .
In 10 years the euro grow to be 26% of the world reserve currency and the dollar fall from 76% to 65%.
100 Yeas ago the pound was the strongest currency in the world, look at it today only 3% of the world reserves are are in pounds.
The IMF is going to sell 403 metric tons of gold. they will be bougt in dollars and the dollars will be used and will return to the U.S. it will make the dollar lose even more value.
There is no escape from the dollar collapse.
It´s no longer in the americans hands to decide.
xeque mate

Posted by pedro | Report as abusive
 
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