Reserve Currency or Bust

by John M. Curtis
(310) 204-8700

Copyright March 25, 2009
All Rights Reserved.                    

                Threatening to strip the mighty U.S. dollar of its reserve currency status, China and Russia have suggested that the International Monetary Fund consider forming a new global reserve currency based on world’s strongest currencies.  China holds nearly $739.6 billion in U.S. treasuries, attesting to its symbiotic relationship with the planet’s most conspicuous consumers.  It’s been almost four years since China severed its ties to the U.S. dollar and floated the yuan.  Since floating the yuan, the dollar has lost about 30% of its value to the yuan, devaluing Chinese investments in U.S. treasuries.  When the G-20 meet in London April 2, Peoples’ Bank of China Gov. Zhou Xiaochuan plans to ask to replace the dollar as the world reserve currency.  China expressed concerns about growing U.S. debt further eroding the dollar, chipping away at China’s investments in U.S. treasuries.

            Speaking at nationally televised press conference, President Barack Obama stopped short of proclaiming the U.S. economy on the rebound.  He spoke confidently about the strength of the U.S. dollar, rejecting the idea of a new global currency.  “I don’t believe there is a need for a global currency,” said Obama, realizing that China and Russia were dead set on pushing for a new global reserve currency.  Both Federal Reserve Board Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner also reject the idea of replacing the U.S. dollar.  China currently holds more than $1 trillion in reserve currency.  Pushing for a new reserve currency would cause chaos at a time of global economic upheaval.  “China appears to be growing more and more assertive over its rights,” said currency analyst Andrew Busch of BMO Capital Markets, seeing trouble at upcoming the G-20.

            European officials, commanding the most clout at the G-20, don’t want to rock the boat during the current economic downturn.   EU Economic and Monetary Affairs Commissioner Juaquin Almunia predicted the dollar would remain as the world’s reserve currency.  “The relative economic powers are changing,” he told the European Parliament in Strasbourg, France, acknowledging the euro has gained ground as a global reserve currency.  “But I don’t expect major structural changes in the role that the dollar plays today as the reserve currency,” signaling that Obama & Co. have their work cut out for them convincing world leaders that the U.S. economy is on the mend.  Perceptions of economic chaos have hurt the U.S. dollar, causing a spike in oil prices.  Bernanke and Geithner will make a strong case to EU central bankers to loosen monetary policy to help ease the global credit crunch.

            Economists see problems with switching global reserve currencies.  “The problem is that there would be winners and losers and no one wants to be the loser,” said Richard Kelly, senior economist at Toronto-Dominion Bank.  “It would be very hard to get a compromise,” signaling that changing the dollar would cost countries considerable wealth.  Since the end of WW II, the dollar has been the global reserve currency used for pricing and trading major commodities like petroleum, gold and silver.  At the end of WW II the Deutsche mark had collapsed with the British Pound Sterling and French Franc losing much its value.  Only the dollar survived the ravages of war, in part because of the strong U.S. industrial base.  With much of U.S. manufacturing shifting to Asia, especially China, the dollar no longer enjoys the same clout.  Restarting U.S. manufacturing would be a positive first step.

            Putting the onus of creating a reserve currency on the IMF is also problematic, considering the U.S. makes the biggest contribution.  When the IMF goes broke or requires cash it goes to the U.S. with cup in hand.  Changing to a new world currency would force all countries currently holding U.S. dollars to convert, potentially causing staggering losses.  Since the U.S. is the world’s biggest donor of foreign aid, many U.N. countries could also face losses.  “I sure there would be reluctance in the U.S. to support this,” said University of Toronto economics professor Paul Mason, believing the U.S. holds the most sway at the G-20.  China and Russia would like a new global currency because few countries buy or sell yuan or ruble-denominated debt.  Rubles are currently valued at only 2% of the U.S. dollar or 14.6% of the yuan, a real problem when it comes to attracting investors.

             When Obama and Geithner arrive in London, they need to show the kind of leadership the world expects.  Watching chaos in U.S. financial and stock markets only adds to China and Russia’s argument for new global reserve currency.  No IMF world currency would hold the same clout as currency based on a real Gross Domestic Product.  Combining currencies might help China or Russia sell some of its debt but offers no assurances to other industrialized powers.  Russia’s economy is hopelessly dependent on petro-dollars, depressed because of the current recession.  While China has certainly made economic progress under capitalistic reforms, it still struggles with widespread poverty and overpopulation.  Its economy is inseparably tied to U.S. conspicuous consumption.  Creating a new reserve currency would only weaken the U.S. dollar and hurt China’s bottom line.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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