PITTSBURGH, Pennsylvania (AFP) – The embattled US dollar is expected to come under scrutiny at a summit of developing and industrialized nations following China-led calls to review its role as a reserve currency.
The dollar issue is bound to surface at the two-day meeting in Pittsburgh as US President Barack Obama and other leaders of the Group of 20 economies debate a new framework for tackling the so called global "economic imbalances" blamed for fuelling the latest financial crisis.
"Though not clear how the plan would be enforced, it would involve measures such as the US cutting its deficits and saving more, China reducing its reliance on exports and Europe making structural changes to boost business investment," analysts at French bank Societe Generale said in a report.
Some argue that the financial crisis resulted from imbalances between savings and investment in major economies, which have led to large current deficits, as evident in the United States, and surpluses, as enjoyed by China.
Beijing was the first to call for a new global currency as an alternative to the US dollar as the US deficit rocketed -- the White House estimates it could reach nine trillion dollars over a decade.
Chinese Premier Wen Jiabao expressed concern as early as March over the safety of his country's huge US bond holdings now worth more than 800 billion dollars, making it the largest creditor to the United States.
Then, Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world's largest, raised the stakes by calling for a new reserve currency in place of the dollar.
He wanted the new reserve unit to be based on the SDR, a "special drawing right" created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.
"These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own," said Richard Cooper, a professor of international economics at Harvard University.
But he said there were no feasible alternatives to the US dollar as a widely used international currency, discounting even IMF's synthetic SDR currency, comprising a basket of the dollar, euro, yen and the pound.
"The dollar will remain the dominant world currency, thanks to the stability of our political system and the rule of law that isn't a feature of many other economies," said Irwin Stelzer, director of economic-policy studies at the Washington-based Hudson Institute.
Some groups, he said, were buying euros and other currencies from time to time, "but not in amounts that threaten the dollar's primacy."
Even the Chinese are stuck with nearly a trillion dollars worth of US bonds and are not likely to drive down the value of that hoard by selling large amounts of dollar-denominated assets, Stelzer said.
But what is baffling analysts is that a key UN agency -- the United Nations Conference on Trade and Development, or UNCTAD -- has joined the chorus of calls for a new reserve currency.
An UNCTAD report this month endorsed a proposal that IMF-issued SDRs "could be used to settle international payments."
Until the current global economic crisis, SDRs issued by the IMF have been used by IMF member nation states "primarily as a reserve account to support international trade transactions, not as an alternative international currency available to settle international debt transactions in danger of default," said political scientist Jerome Corsi in "Red Alert," a global financial newsletter.
China, meanwhile, continues to flex its muscle.
It has proposed that the G20 economies consider setting up an international wealth fund that would invest a portion of its members' current-account surpluses in developing economies.
"These comments reinforce their desire to diversify out of dollars and to encourage other nations to do so as well," said Kathy Lien, chief strategist for Global Forex Trading.
A few Chinese deals were recently seen accepting payment in the currency of the buyer rather than in dollars, especially with Brazil, which the Asian giant is wooing as a future oil supplier.
In addition, China -- the first nation to sign an agreement to buy IMF bonds -- took the unsual step of paying for the papers equivalent of 50 billion dollars with its yuan currency rather than dollars, which Beijing uses for much of its trade and other foreign transactions.
Carl Weinberg, chief economist of High Frequency Economics, said he was surprised by the move but did not see it having any major impact on the dollar.
"The transaction can now be clearly seen as a political move by Beijing to get more traction in the governance of the IMF, not as an effort by the PBOC (Chinese central bank) to reduce the share of dollars in its reserve asset," he said.
Victor Ulasi Member of the European Press Federation Tel:+2348079336622 firstname.lastname@example.org