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UN Panel Says World Should Ditch Dollar
Wednesday 18 March 2009 by: Jeremy Gaunt | Visit article original @ Reuters A South Korean bank clerk stands next to US dollars in the Korea Exchange Bank. Next week the UN is expected to recommend that the dollar be abandoned as the main global reserve currency and replaced with a shared global reserve currency.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket. Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform. "It is a good moment to move to a shared reserve currency," he said. Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits. Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings. "Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note. Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday. It has significantly reduced the dollar's share in its own reserves in recent years. Good Time Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar. "There is a moment that can be grasped for change," he said. "Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances." Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations. The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and indeed against those inside the basket. Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar. The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma. Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades. A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role. UPDATE: Dollar Declines Most Since 1985 Plaza Accord on Fed Bond Buying March 21 (Bloomberg) -- The dollar dropped the most against the currencies of six major U.S. trading partners since the Plaza Accord almost a quarter-century ago as the Federal Reserve’s plan to purchase Treasuries spurred speculation that it’s debasing the greenback. "What it introduces is the problem of the currency to the extent that the Fed is buying what isn’t desired by foreign holders," said Bill Gross, co-chief investment officer of Pacific Investment Management Co., in an interview on Bloomberg Television on March 19. "The Fed can keep interest rates where they want to keep them, at least for a 6- to 12- to 18-month period of time, but it will have consequences down the road." The U.S. currency weakened beyond $1.37 per euro this week for the first time since January as the central bank's decision to increase its balance sheet by $1.15 trillion lowered yields, making American assets less attractive. The Norwegian krone and the New Zealand dollar rallied as the Fed's move spurred advances in commodities. The dollar depreciated 4.8 percent to $1.3582 per euro yesterday, from $1.2928 on March 13. The U.S. currency touched $1.3738 on March 19, the weakest level since Jan. 9. The dollar also fell 2.1 percent to 95.94 yen from 97.95. The euro increased for a fifth week versus the yen, gaining 2.9 percent to 130.29 after touching 130.49 yesterday, the highest level since Dec. 18. The ICE's trade-weighted Dollar Index dropped 4.1 percent this week to 83.84, the biggest decrease since the week in September 1985 when the U.S., U.K., France, Japan and West Germany agreed at New York's Plaza Hotel to coordinate the devaluation of the dollar against the yen and deutsche mark. Fed's Announcement The U.S. currency tumbled 3.4 percent versus the euro on March 18, the biggest drop since the 16-nation currency's 1999 debut, when the Fed unexpectedly announced at the end of its two-day policy meeting that it will buy up to $300 billion of Treasuries and increase its purchase of agency mortgage-backed securities, a policy known as quantitative easing. "The dollar's decline this week has more or less priced in the policy response," said David Woo, global head of foreign-exchange strategy at Barclays Capital in London, in an interview on Bloomberg Television. "Over the next three months, I don't see much downside for the dollar to the extent other central banks will be under pressure to follow the Fed's lead and essentially go down the route of quantitative easing." Stocks advanced this week, while crude oil had a fifth week of gains, the longest winning streak in 11 months. The Standard & Poor's 500 Index increased 1.6 percent. Crude oil rose above $50 a barrel. Norway's Krone Norway's krone was the best performer versus the dollar among the major currencies, increasing 7 percent this week to 6.377, the biggest advance since 1973. The Australian dollar gained 4.4 percent to 68.69 U.S. cents, extending its advance in March to 7.5 percent. Crude oil is Norway's largest export, while raw materials account for 60 percent of Australia's overseas sales. Colombia's peso increased 3.6 percent to 2,359 per dollar, while the South Korean won appreciated 5 percent to 1,412.25 on demand for emerging-market assets. "The rise in risk appetite may be sustained in the near term, which would make the dollar weaker still," a team led by Vincent Chaigneau, head of fixed-income and currency strategy at Societe Generale SA in London, wrote in a research note yesterday. "We remain skeptical about the durability of that run, but still believe that the newly found dollar weakness could last." Treasury Yield The yield on the benchmark 10-year Treasury note dropped the most since January 1962 on the day of the Fed's announcement and fell 0.26 percentage point this week in its biggest decrease since December. At 2.63 percent, the yield was 0.34 percentage point lower than that of the comparable-maturity German bund. The gap widened 0.16 percentage point from a week earlier, making U.S. assets less attractive. "We would by no means assume that the reaction to the Fed's quantitative-easing announcement has run its course," Credit Suisse Group AG currency strategists led by London-based Ray Farris wrote in a research note yesterday. "Fed purchases of Treasuries are likely to be quite problematic for the U.S. dollar, particularly given large foreign holdings of Treasuries and the loss of yield support for the dollar that Fed purchases have caused." Foreigners hold about half of the marketable Treasury debts that are outstanding. China, the biggest foreign holder, with $740 billion, is "worried" about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said at a press briefing in Beijing two weeks ago. Goldman Sachs Group Inc. raised on March 19 the target on its bet against the dollar to $1.40 per euro, and Citigroup Inc. recommended on the same day that its clients buy the euro versus the dollar. The yen fell to a three-month low against the euro as the Bank of Japan bought government notes and made subordinated loans to banks to spur the economy. The stretch of weekly declines was the longest since July.
Comments: I cannot understand why foreign countries would want to devalue the dollar by making it less in demand. For example, China holds massive dollar reserves and this action would immediately deflate the value of these reserves. On the other hand, the devalue of the dollar would be great for America since the dollars they owe in foreign debt would be worth less and be easier to pay debts with. In the end, I think this move would likely screw everyone who holds money in banks since the value of their saved money would be severely decreased. This could put many retirement age people on the streets - literally. See Viewzone's Money Article to understand how the dollar is only valuable as long as countries need it to buy oil. If oil is purchased in any other currency then the dollar is essentially a piece of paper and ink with no gold or value to back it up. The whole Federal Reserve system is one big Ponzi scheme and the world will soon face this reality if the dollar is dethroned as the global standard. C. Klien |
Luxembourg - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.