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US backing for world currency stuns markets
US Treasury Secretary Tim Geithner shocked global markets by revealing
that Washington is "quite open" to Chinese proposals for the gradual
development of a global reserve currency run by the International
Monetary Fund.
By Ambrose Evans-Pritchard
Last Updated: 9:19PM GMT 25 Mar 2009
US backing for world currency stuns markets
US backing for world currency stuns markets
The dollar plunged instantly against the euro, yen, and sterling as the
comments flashed across trading screens. David Bloom, currency chief at
HSBC, said the apparent policy shift amounts to an earthquake in
geo-finance.
"The mere fact that the US Treasury Secretary is even entertaining
thoughts that the dollar may cease being the anchor of the global
monetary system has caused consternation," he said.
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Mr Geithner later qualified his remarks, insisting that the dollar would
remain the "world's dominant reserve currency ... for a long period of
time" but the seeds of doubt have been sown.
The markets appear baffled by the confused statements emanating from
Washington. President Barack Obama told a new conference hours earlier
that there was no threat to the reserve status of the dollar.
"I don't believe that there is a need for a global currency. The reason
the dollar is strong right now is because investors consider the United
States the strongest economy in the world with the most stable political
system in the world," he said.
The Chinese proposal, outlined this week by central bank governor Zhou
Xiaochuan, calls for a "super-sovereign reserve currency" under IMF
management, turning the Fund into a sort of world central bank.
The idea is that the IMF should activate its dormant powers to issue
Special Drawing Rights. These SDRs would expand their role over time,
becoming a "widely-accepted means of payments".
Mr Bloom said that any switch towards use of SDRs has direct
implications for the currency markets. At the moment, 65pc of the
world's $6.8 trillion stash of foreign reserves is held in dollars. But
the dollar makes up just 42pc of the basket weighting of SDRs. So any
SDR purchase under current rules must favour the euro, yen and sterling.
Beijing has the backing of Russia and a clutch of emerging powers in
Asia and Latin America. Economists have toyed with such schemes before
but the issue has vaulted to the top of the political agenda as creditor
states around the world takes fright at the extreme measures now being
adopted by the Federal Reserve, especially the decision to buy US
government debt directly with printed money.
Mr Bloom said the US is discovering that the sensitivities of creditors
cannot be ignored. "China holds almost 30pc of the world's entire
reserves. What they say matters," he said.
Mr Geithner's friendly comments about the SDR plan seem intended to
soothe Chinese feelings after a spat in January over alleged currency
manipulation by Beijing, but he will now have to explain his own
categorical assurance to Congress on Tuesday that he would not
countenance any moves towards a world currency.
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