It will probably take some disaster to dislodge the US Dollar, and force the changeover

TO BE NOTED: From the Aleph Blog:

"Translation: We Really, REALLY, Hate You Guys!!

From an earlier post, point 4:

“We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.” [emphasis mine]

So said Mr. Luo, a director-general at the China Banking Regulatory Commission. I’ve been saying for a long time that China is stuck, and that we are their problem, and not vice-versa. There may come a point where they stop buying US Dollar-denominated debt, and let existing debt mature, but that will come after a shift in their own economy where they are no longer driven bythe promotion of their exports. There aren’t many large good alternatives to US debt for parking the proceeds from exporting aggressively.

So today, we get another volley from China as they realize that they are stuck holding US Dollar denominated assets that they are more certain than ever will depreciate. They see injustice in having bought too many dollars in exchange for the exports they paid to promote to the US. Excerpting from the article:

People’s Bank of China Governor Zhou Xiaochuan said he wants to replace the dollar, installed as the reserve currencyWorld War II, with a different standard run by the International Monetary Fund (IMF). after

China, the top holder of US Treasury bonds with 739.6 billion dollars as of January, according to American figures, earlier expressed concern over its investment as the world’s largest economy battles a deep recession.

“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,” Zhou wrote in an essay posted on the bank’s website Monday.

Zhou’s comments come ahead of the G20 summit from April 2 in London, where world leaders and international organisations including the IMF are to discuss reforming the financial system.

He suggested the IMF’s Special Drawing Rights, or SDR, could serve as a super-sovereign reserve currency as it would not be easily influenced by the policies of individual countries.

Russia has also proposed the summit discuss creating a supranational reserve currency. The IMF created the SDR as an international reserve asset in 1969, but it is only used by governments and international institutions.

“The reform should be guided by a grand vision and start with specific deliverables,” Zhou wrote. “It should be a gradual process that yields win-win results for all.”

However, China’s proposal was unlikely to lead anywhere because the SDR is not a currency system backed up by a government, independent Shanghai-based economist Andy Xie said.

Xie said the proposal was probably a protest aimed at Washington’s plan to buy one trillion dollars of its own debt, diluting the value of China’s dollar reserves and raising fears of inflation.

“It’s a sad situation: China is America’s banker. America owes so much to China, but it’s not afraid of China,” he said. “China is America’s hostage. It’s not the other way around.” [emphasis mine]

As the world’s main reserve currency, US dollars account for most governments’ foreign exchange reserves and are used to set international market prices for oil, gold and other currencies.

As the issuer of the reserve currency, the US pays less for products and borrows more easily.

Strategic Drawing Rights are a cute idea, but it would be too small to support global trade. Like the Euro, it is a political construct, but one with less dedicated political and economic support.

As I commented in my piece, It is Good to be the World’s Reserve Currency, there’s no good alternative to the US Dollar yet. Like the mercantilists of old, who bought gold dear, and sold it cheaply, so will it be for China — they bought US Dollar claims dear, but will sell them more cheaply. This is the price of forced industrialization.

There will come a time when the US Dollar is no longer the world’s reserve currency, but there needs to be a worthy competitor, or a willingness to do without a single clearing unit. This is an age of computers, so there does not need to be a single dominant unit of exchange, but habits die hard. It will probably take some disaster to dislodge the US Dollar, and force the changeover. Whether that comes through inflation, default, partial default, or war remains to be seen."

“I don’t believe there is the need for a global currency,” Obama said.

TO BE NOTED: From Bloomberg:

"China ‘Super Currency’ Call Shows Dollar Concern (Update4)

Share | Email | Print | A A A

By Li Yanping

March 25 (Bloomberg) -- China’s call for the creation of a new international reserve currency may signal its concern at the dollar’s weakness and ambitions for a leadership role at next week’s Group of 20 summit, economists said.

Central bank Governor Zhou Xiaochuan this week urged the International Monetary Fund to create a “super-sovereign reserve currency.” The dollar weakened after the Federal Reserve said it would buy Treasuries and the U.S. government outlined plans to buy illiquid bank assets

“China is concerned about the potential for a slide in the dollar as the U.S. attempts to stimulate its economy,” said Mark Williams, a London-based economist at Capital Economics Ltd. The “rare” sight of a Chinese official attempting to reframe an international debate may be “a sign of China becoming more engaged,” he said.

While Zhou didn’t call for the yuan to become the new reserve currency, his remarks may signal ambitions for China to play a bigger global role. The central bank this week signed a currency swap with Indonesia, adding to agreements since December with South Korea, Hong Kong, Malaysia and Belarus. It’s also preparing for trade settlement in the Chinese currency with Hong Kong, Macau and the Association of Southeast Asian Nations.

Frustration in Beijing

“There is concern and even frustration among top policymakers in Beijing about China’s high exposure to U.S. dollar-denominated financial assets,” said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong.

Yuan forwards rose the most in three months with traders betting on appreciation for the first time since September on speculation that the U.S. policies will weaken the dollar. The 12-month forward rate gained 0.9 percent.

President Barack Obama, speaking at a press conference at the White House in Washington, joined U.S. policy makers affirming their support for the dollar today.

“I don’t believe there is the need for a global currency,” Obama said.

Treasury Secretary Timothy Geithner, asked at a House Financial Services Committee hearing whether he rejected moving toward a global currency, replied, “I would, yes.”

“I would also,” said Federal Reserve Chairman Ben S. Bernanke. The question was asked by Representative Michele Bachmann, a Minnesota Republican.

Premier Wen Jiabao called on March 13 for the U.S. “to guarantee the safety of China’s assets.” China’s Treasury holdings climbed 46 percent in 2008 and now stand at about $740 billion, according to U.S. government data. The nation is the biggest holder of U.S. debt.

‘A Little Disingenuous’

“The Chinese are a little disingenuous in saying that it’s so bad that we own all these dollars,” former Fed Chairman Paul Volcker, an adviser to Obama, said today at the Wall Street Journal’s “Future of Finance” conference in Washington. “They own all the dollars because they chose to buy the dollars and they didn’t want to sell the dollars.”

China is promoting use of the yuan to smooth currency volatility and to serve “a long-standing interest” to raise its status to that of a global reserve currency, said Ben Simpfendorfer, an economist at Royal Bank of Scotland Group Plc in Hong Kong. Such moves are not “a knee-jerk response” to the economic crisis, he said.

“If turning the Chinese yuan into a global reserve currency sounds ambitious, then encouraging its adoption as a regional reserve currency is more straightforward,” said Simpfendorfer.

IMF Reforms

G-20 leaders will gather in London on April 2 to forge a common response to the financial crisis that has spawned a global recession. The summit will discuss proposals for reforms of the International Monetary Fund.

The timing of Zhou’s proposal is “the latest example of China’s policy of neo-assertiveness in world affairs,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “China is starting to flex some muscle and generally steer the debate in China’s own direction.”

Zhou’s article highlighted the “dilemma” that countries issuing reserve currencies face in balancing their own monetary- policy goals with other nations’ demand for their money.

The global crisis raised the question of which reserve currency would secure “global financial stability and facilitate world economic growth,” Zhou said. He proposed expanding the use of the IMF’s Special Drawing Rights, which are currency units valued against a composite of currencies.

Currency Basket

“The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and gross domestic product may also be included as a weighting,” said Zhou.

Some economists back his case.

“The world economic landscape has been changed since the establishment of the SDR 40 years ago,” said Ha Jiming, chief economist at China International Capital Corp. in Hong Kong. “Specifically, no such reserve currency would make sense without the yuan being included.”

China’s leaders may press at the Group of 20 summit for specific steps to protect its more than $1 trillion of dollar assets as U.S. fiscal policies risk sparking a “currency war,” an official at a state academy said.

The dollar weakened after the Federal Reserve said March 18 it would buy as much as $300 billion of Treasuries and the U.S. this week outlined plans to buy as much as $1 trillion of illiquid bank assets.

U.S. purchases of Treasuries are “irresponsible” because they may weaken the dollar, Li Xiangyang, of the government- backed Chinese Academy of Social Sciences, told a forum in Beijing yesterday. “Chinese leaders are likely to articulate their concern to their U.S. counterparts strongly and ask for specific measures.”