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China, Others, Urge Move Away From Dollar As Reserve Currency

Taking aim at the U.S. dollar
Taking aim at the U.S. dollar
(RFE/RL) -- Should the world ditch the dollar as its reserve currency? It's an idea that seems to be gaining ground.

The latest call came from China's central bank governor, who said on March 23 there should be a new international reserve currency. And a UN panel this week is to recommend moving away from the dollar and adopting a shared basket of currencies instead.

Zhou Xiaochuan's message seemed aimed at an international audience. His essay was published on the central bank's website in English, as well as Chinese.

In it, the governor said the global financial crisis had revealed "vulnerabilities and systemic risks" in the current monetary system.

Instead, he said the world needed something more stable -- what he called a "super-sovereign reserve currency."

Zhou didn't mention the dollar specifically. But his comments came two weeks after the Chinese Prime Minister Wen Jiabao expressed concern over the safety of China's estimated $1 trillion worth of U.S. investments.

China Not Alone

The worry is that U.S. efforts to tackle the financial crisis -- including printing money -- could erode the value of the dollar and of China's dollar-denominated reserves.

Chinese officials are not alone in calling for a move away from the dollar as the world's chief reserve currency.

Earlier this month, Russia said it would propose a new reserve currency for discussion at the G20 summit set for April 2.

And a UN panel of experts is this week recommending a switch away from the dollar as part of an overhaul of the global monetary system.

"Now is the moment to think seriously about a new reserve currency, a shared reserve currency," panel member Avinash Persaud told Reuters. "When part of the world wants to save more than it did before, this won't lead to a concentration of assets in one place, but more spread around the world. It's good for those people who've got the savings, [because] their assets are diversified, and it's good for those people where the money is flowing."

Zhou, the Kremlin, and to a lesser degree the UN panel -- all are advocating an expanded role for the SDR, or "special drawing right." That's a kind of artificial currency created by the International Monetary Fund 40 years ago. Its value is based on a basket of "real" currencies -- the dollar, the euro, and others.

Essentially it's used as an accounting unit for transactions between the IMF and members.

But Zhou says the SDR could become a "widely accepted" means of payment in international trade and financial transactions. He also advocates creating financial assets denominated in SDRs.

'Global Imbalances'

Such a move would, the argument goes, reduce the kind of "global imbalances" that contributed to the current economic crisis.

Chief among them are America's huge current-account deficits and China's equally huge surplus.

China invested its surplus in massive purchases of U.S. treasuries, a factor blamed for contributing to low borrowing costs in America that fueled its housing bubble.

So the United States might even take a favorable view, says Vanessa Rossi, a senior research fellow in international economics at the Chatham House think tank in London.

"Since they've complained so much about these problems about imbalances, and the flows of money associate with it, they might welcome some of the strain being taken off the dollar and the dollar markets in the future. Very immediately they might think that," Rossi says.

"Looking at today's situation, they have other very immediate needs. But if you look over the next few years, many countries ought to welcome this possible move. It ought to relieve some of that pressure we've seen over the past years," she adds.

But Rossi says a new reserve currency would pose major challenges, and any move would be over the longer term.

That's because even if the idea picked up more steam, it's likely to face huge technical, logistical, and political obstacles.

And it would clearly have negative implications for the dollar.

Even those taking aim at the dollar wouldn't welcome a sudden move, as this could trigger a sell-off of the dollar and erode the value of their holdings.

Perhaps explaining why Zhou said the establishment of a new reserve currency "may take a long time."

Sergei Seninski of RFE/RL's Russian Service contributed to this report

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