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Mar 23, 2009

GATA Dispatches: "Falling dollar prompts BRIC to rethink dollar"

Submitted by cpowell on 07:13PM ET Monday, March 23, 2009. Section: Daily Dispatches By Sebastian Tong and Peter AppsReutersMonday, March 23, 2009http://www.reuters.com/article/reutersEdge/idUSTRE52M5UZ20090323LONDON -- A push by the world's leading emerging economies to dislodge the dollar as the dominant global reserve currency appears to be gaining momentum even as a weakening greenback adds further urgency to the discussion.China on Monday added its voice to a growing international chorus seeking the replacement of the dollar as the main reserve currency, urging for an overhaul of the global monetary system to allow for wider use of Special Drawing Rights (SDRs) allocated by the International Monetary Fund (IMF).Chinese central bank chief Zhou Xiaochuan said the SDRs, created by the IMF as international reserve assets in 1965, could be used as a super-sovereign reserve currency, eventually displacing the dollar.His comments come a week after Russia said it would put forward a proposal for the creation of a new reserve currency issued by international financial institutions at the G20 meeting in April.Russia said it had the broad support of its fellow BRIC countries -- Brazil, India and China -- as well as South Korea and South Africa for its proposal.The push underscores growing concerns among emerging-market leaders about the long-term value of the dollar.The dollar saw its biggest weekly slide since 1985 .DXY last week after the Federal Reserve's decision to buy long-term government debt raised the specter of oversupply in dollars.That emerging economies -- among the largest dollar holders in the world thanks to strong export revenues -- want to diversify reserves away from the dollar is not only sensible but inevitable, argues Jerome Booth, Ashmore Investment Management research head."The unknowns are how fast and the disruption this may cause," Booth said.China, which has the world's largest foreign-currency reserves at close to $2 trillion, would be especially keen to avoid a widespread dollar selloff.Chinese Premier Wen Jiabao said this month that he was worried about China's heavy exposure to the United States -- which, taking into account its US Treasuries and other bond holdings, is estimated to represent about a two-thirds of its reserves.Any Chinese move to reweight its reserves portfolio could be destabilizing to the value of the greenback because of the level of market scrutiny."As soon as you selloff a part of your reserves, people will expect you to sell the rest so the value of everything you have would plummet," said Jon Harrison, emerging foreign exchange strategist at Dresdner Kleinwort.SDRs, which have a value based on a basket of key international currencies, also serve as the unit of account of the IMF and some other international organizations."If you really believed that (the SDR adoption) was going to happen, you'd want to sell the dollar and buy other currencies that would be part of the SDR basket -- euros, yen, and perhaps the pound," said Dresdner's Harrison.China's Zhou has said global acceptance of a new reserve currency would take a long time, and would be "a bold initiative that requires extraordinary political vision and courage."Russia, which has significantly reduced the dollar's share of its own reserves in recent years in tandem with the 2005 introduction of a euro/dollar basket for tracking the rouble, has signaled it does not expect to see any reforms rising from the Group of 20 nations meeting in London on April 2.Still, Russia and China's push for a global super-sovereign reserve currency could have resonance beyond the corridors of power in the developing world -- possibly even in Washington.Adopting a super-sovereign reserve currency such as SDRs could do away with the global imbalances of recent years that allowed the United States to run up large twin budget and external deficits while export-oriented emerging economies accumulated dollar-denominated reserves.This global imbalance has been blamed for the cheap borrowing costs in the U.S. that contributed to subprime mortgage bust that triggered the global credit crunch.A United Nations panel of experts this week is set to recommend the world ditch the dollar as its reserve currency in favor of a shared basket.Avinash Persaud, a member of the UN Commission of Experts on International Financial Reform, said the creation of something like the old Ecu -- or European currency unit -- as a hard-traded weighted basket was one of the recommendations that would be delivered to the U.N. on Wednesday.Politics will determine the timing of any diversification moves, Ashmore's Booth said."Central banks are watching each other. ... Many countries may want to start a senior dialogue with the new US administration before selling their Treasuries," he said.
* * * Join GATA here:Bahamas Investment ConferenceThursday-Friday, March 26-27, 2009Atlantis Resort and Casino, Nassauhttp://www.bahamasinvestmentconference.com/signup.html* * *Help keep GATA goingGATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:http://www.gata.orgTo contribute to GATA, please visit:
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Fernando Guzmán

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GATA Dispatches:"Chinese central bankers sketches plan for new reserve currency."

Submitted by cpowell on 04:44AM ET Monday, March 23, 2009. Section: Daily Dispatches By Alan WheatleyReutersMonday, March 23, 2009http://www.reuters.com/article/marketsNews/idINPEK18455820090323?rpc=44BEIJING -- China's central bank chief on Monday proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right.The SDR is an international reserve asset created by the International Monetary Fund in 1969 that has the potential to act as a super-sovereign reserve currency, Zhou Xiaochuan, governor of the People's Bank of China, said in remarks published on Monday on the bank's website, www.pbc.gov.cn."The role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system," Zhou said.Zhou did not refer directly to the dollar.But his speech, issued in English as well as Chinese, spells out in detail Beijing's dissatisfaction with the primacy of the U.S. currency, which Zhou says has led to increasingly frequent international financial crises since the collapse of the Bretton Woods system of fixed but adjustable exchange rates in 1971."The price is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws," Zhou said."The desirable goal of reforming the international monetary system, therefore, is to create an international 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," he added. A super-sovereign reserve currency not only eliminates the risks inherent in a credit-based currency such as the dollar -- in contrast to one backed by gold -- but also makes it possible to manage global liquidity, Zhou argued."And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability." he said.Reform of the international monetary system is likely to take a back seat to the more pressing task of economic and financial stabilisation when leaders of the Group of 20 developed and emerging economies meet in London on April 2.But Zhou's speech shows that the issue is a pressing one for China, whose top officials regularly bemoan the volatility of the dollar and what they see as mismanagement of the world's leading economy.Zhou acknowledged that establishing a new reserve currency that commands wide acceptance may take a long time. It would be a "bold initiative that requires extraordinary political vision and courage." Allocating more SDRs would not only give the IMF more resources but would also help it address imbalances in the representation and voice of developing countries in the IMF, where the United States wields a veto over major decisions.As well as a further allocation of SDRs, Zhou proposed the following steps to broaden the unit's use so it can fully satisfy member countries' demand for a reserve currency:-- Set up a settlement system between the SDR and other currencies so it can be widely accepted in global trade and financial transactions. Currently, the SDR is largely an artificial unit used by governments and international institutions.-- Actively promote the use of the SDR in trade, commodities pricing, investment, and corporate bookkeeping.-- Create financial assets denominated in SDRs to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, would be a good start, Zhou said.-- Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies.Zhou said the IMF, with its universal membership and mandate to maintain monetary and financial stability, had a natural advantage to act as the manager of its members countries' reserves in the form of the SDR."This arrangement will not only promote the development of SDR-denominated assets, but also partially makes the management of liquidity in the form of the existing reserve currencies possible. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR," he said.
* * * Join GATA here:Bahamas Investment ConferenceThursday-Friday, March 26-27, 2009Atlantis Resort and Casino, Nassau
http://www.bahamasinvestmentconference.com/signup.html* * *Help keep GATA goingGATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:http://www.gata.orgTo contribute to GATA, please visit:
http://www.gata.org/node/16Contact GATAinfo@gata.orgGold Anti-Trust Action Committee7 Villa Louisa RoadManchester, Connecticut06043-7541 USA
www.gata.org