Wednesday, March 25, 2009

US Willing to Look at China Currency Proposal

Curt Here...

Just a quick update as the US has responded to China's interest in a new reserve currency. It appears as if US Treasury Secretary Timothy Geithner acknowledged that the US is willing to explore China's proposal, but according to Geithner any change would be "evolutionary" and that a new currency would not replace the dollar anytime soon.

This is obviously a rapidly developing story and I am not sure what to think at the moment. My first impression is that the US administration is trying to publicly bail out a sinking ship, but I could be off in that assessment. If anyone has any thoughts or ideas as to what this could mean, please post in the comments section.

I am sure there is more to come on this so,

Stay Tuned.



US willing to look at China currency proposal

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.

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 Y97.58against the yen and dropped 0.7 per cent to SFr1.1225 against the Swiss franc.


Jaclyn said...

Curt, they are all smoke and mirrors, bait and switch. Much of
what they say is for PR purposes.

Watch what they DO, at this point they are doing all they can to crash the economy and collapse the dollar, bringing us to such desperation we will accept any kind
of remedy in the name of relief. Also known as "order out of chaos".

Their goal is globalism in every respect and their actions support this, their words are meaningless.

Just my opinion;-)

the70thweek said...

Thanks for your thoughts Jaclyn. I tend to agree with you, globalism is the goal here and watching what they actually do, rather than what they say is very good advice.


the70thweek said...

UN panel touts new global currency reserve system

A UN panel of expert economists pressed Thursday for a new global currency reserve scheme to replace the volatile, dollar-based system and for coordinated steps by rich countries to stimulate their economies.

"A new Global Reserve System -- what may be viewed as a greatly expanded SDR (Special Drawing Rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity," the panel said.

As part of several recommendations to tackle the global financial crisis, the panel also noted recovery would require all developed countries, in the short term, to take "strong, coordinated and effective actions to stimulate their economies."

And it stressed the need to "lay the basis for the long-run reforms that will be necessary if we are to have a more stable and more prosperous global economy and avoid future global crises."

The commission, led by US economist Joseph Stiglitz, a frequent critic of globalization and unbridled free markets, is primarily aimed at finding solutions for developing countries.

On the monetary front, Stiglitz, the 2001 Nobel economics laureate, told a press conference here there was "a growing consensus that there are problems with the dollar reserve system.

He noted that such a system was "relatively volatile, deflationary, unstable and (had) inequity associated with it."

"Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves," Stiglitz noted. "It's indicative of the nature of the problem. It's a net transfer, in a sense, to the United States, a form of foreign aid."

This week, China's central bank chief Zhou Xiaochuan suggested the dollar could be replaced as a reserve currency by an International Monetary Fund (IMF) basket comprising dollars, euros, sterling and yen, saying it would not be easily influenced by individual countries.

But the UN panel warned that a two (or three) country reserve system "may be equally unstable."

It said a new Global Reserve "is feasible, non-inflationary and could be easily implemented, including in ways which mitigate the difficulties caused by asymmetric adjustment between surplus and deficit countries."

Stiglitz said his panel's experts were currently trying "to lay out the conceptual framework of how this might be done."

The issue of the world currency reserve is expected to be raised at the April 2 summit of the G20 club of developed and emerging economies.

On Wednesday IMF managing director Dominique Strauss-Kahn said that talks on a new global reserve currency to replace the US dollar were "legitimate" and could take place "in the coming months."

But US Treasury Secretary Timothy Geithner earlier defended the dollar as a key global reserve currency.

"I think the dollar remains the world's standard reserve currency, I think that's likely to continue for a long period of time," he said.

Among other recommendations, the Stiglitz panel proposed western aid to help developing nations out of the crisis, better market regulation, a reform of central bank practices and of international financial institutions, as well as the creation of a new structure such as a United Nations economic council.

It specifically called for immediate, additional funding for developing countries "just to offset the imbalances and inequities created by the massive stimulus and bail-out measures introduced by advanced industrialized countries."

It said the funds could come through the issuance of SDRs approved by the IMF board in 1997.

SDRs are an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries and support the Bretton Woods fixed exchange rate system.

They are allocated to member countries in proportion to their IMF quotas.