US Willing To Look At China Currency Proposal

Source : http://www.ft.com

The US is willing to explore China’s proposal to give a synthetic global currency a larger role in the international financial system, Tim Geithner, US Treasury secretary, said on Wednesday.

But Mr Geithner said any change would be evolutionary and that the synthetic currency, called the International Monetary Fund Special Drawing Rights (SDRs), would not replace the dollar.

He said there would be no ”global monetary union” and the future of the dollar in the world system would rest on the US government’s ability to overcome the financial crisis and then put its fiscal house in order.

The comments came after calls by Zhou Xiaochuan, China’s central bank governor, for a new global currency as an alternative to the dollar.

China’s idea of a new currency would in effect expand the use of the SDR, a currency devised by the IMF in 1969 that was initially pegged to the dollar but is now based on the value of four different currencies: the dollar, yen, euro and pound.

Mitul Kotecha at Calyon said China’s comments came at a time when the dollar was probably at its most vulnerable, given that the value of the currency was being debased in the wake of the quantitative easing policy of the Federal Reserve and the massive increase in the US fiscal stimulus.

“Should global reserve managers shift away from the dollar as a reserve currency, it would have a massive impact on US markets,” he said.

“Arguably the huge inflow of foreign capital into US Treasuries over recent years has helped to keep mortgage interest rates low and played a part in fuelling the crisis that the economy is currently facing.”

But he said any shift to the SDR or any other currency could take many years to implement and at the moment global authorities had enough on their plate determining the correct policy to revive economic growth.

“The dollar may not be the ideal currency for global reserves and has certainly lost some of its allure, but there is little else than can replace it anytime soon,” Mr Kotecha said.

“We believe there is scope for a dollar rebound as the recent sell-off looks overdone, with markets unlikely to pay too much attention to calls to move away from the currency given the difficulty in doing so.”

Marc Chandler, at Brown Brothers Harriman, advised against reading too much into Mr Geithner’s comments.

He said remarks from Barack Obama, US president, who on Tuesday said there was no need for another reserve currency and that the dollar was fundamentally strong, were the underlying signal coming from the US administration.

“Given the deflation threat and the liquidity crisis a new SDR issuance may make sense, but it does not take away from the dollar’s role [as a reserve currency],” said Mr Chandler.

“The SDR is not money in the commonly used sense of a means of exchange or a store of value. It is primarily a unit of account.”

The dollar fell 0.6 per cent to $1.3551 against the euro, lost 0.3 per cent to Y97.58 against the yen and dropped 0.7 per cent to SFr1.1225 against the Swiss franc.

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