Talk Of Dollar Losing Reserve Status Should Stop. By Nicholas Hastings
This week's summit of the Group of Eight industrialized nations in L'Aquila, Italy should do one thing - knock talk of an alternative reserve currency on the head.
For months, the BRIC countries - Brazil, Russia, India and China - have hinted that the dollar is no longer up to the job.
Given the risks of some future current account correction in the dollar, this is hardly surprising.
However, as most of these countries are now realizing, any attempts to force the issue in the near term will be counterproductive and any moves towards diversifying reserves is a longer-term project that will require more widespread support from other major economies.
This hasn't prevented a constant trickle of negative commentary - the latest coming from an advisor to the Indian Prime Minister calling for a greater diversification of reserve currencies.
Even France appeared to be joining the fray last weekend with Finance Minister Christine Lagarde saying that there is a need to "explore better coordination of exchange rate policy."
However, the comments from the BRIC nations have been confused and conflicting and there is little sign that even these four could agree on how to proceed.
If anything, the whole exercise appears designed just to attract attention as the BRIC members make a bid to get a more prominent role in international financial institutions.
Hopes that they might have got the whole issue of diversification on the G8 agenda and even in the communique this week have rapidly faded with the topic being relegated to unofficial discussions in the corridors.
Even the Russian President Dmitry Medvedev appeared to acknowledge the futility of trying to knock the dollar from its position as the global currency of choice. He said that he sees "no alternative" to the dollar at present.
His comments echo those by some Chinese officials, who after suggesting that diversification is needed, have conceded that the dollar remains preeminent.
This gradual reversal is hardly surprising, given the damage that the BRIC countries could inflict on the value of their own reserves if they pursued the diversification issue more aggressively.
Marshall Gittler, chief strategist at Deutsche Private Wealth Management in Geneva, said they are backing away from their original positions "in the realization that it just shoots themselves in the foot so long as they are still holding a large part of their reserves in the dollar."
Also, there is the continued weakness of the global recovery - an issue that is likely to be the key issue of the summit.
As many countries recover only very slowly from the global recession, the last thing they will want is a dollar weakened by diversification talk. This will make their own currencies more expensive and make it more difficult to get a competitive edge in export markets.
"It is in nobody's interest if the dollar depreciates massively," said the currency strategist team at Commerzbank, providing another reason why diversification is becoming less of a relevant issue for G8 leaders or the dollar.
Early Tuesday in Europe, risk aversion continued to drive currency market sentiment with the dollar and the yen reaping the benefits. A brief rally in U.S. equities, following the release of a slightly better-than-expected ISM survey for U.S. non-manufacturers Monday, was quickly reversed in Japan with the Nikkei falling 0.3% Tuesday.
A combination of dovish comments from the Reserve Bank of Australia, warning that it could cut rates again, as well as an admission from U.S. President Barack Obama's economic advisor Laura Tyson that the U.S. economy was in worse shape than anticipated, undermined any optimism.
The market is now focused on whether a series of U.S. Treasury auctions this week will attract much-needed foreign support and whether the start of the second-quarter earnings season will help to lift hopes of corporate recovery.
By 0712 GMT, the dollar was down at Y95.14 from Y95.35 late on Monday in New York, according to EBS. The euro was down at $1.3922 from $1.3980 and down at Y132.51 from Y133.34.
For months, the BRIC countries - Brazil, Russia, India and China - have hinted that the dollar is no longer up to the job.
Given the risks of some future current account correction in the dollar, this is hardly surprising.
However, as most of these countries are now realizing, any attempts to force the issue in the near term will be counterproductive and any moves towards diversifying reserves is a longer-term project that will require more widespread support from other major economies.
This hasn't prevented a constant trickle of negative commentary - the latest coming from an advisor to the Indian Prime Minister calling for a greater diversification of reserve currencies.
Even France appeared to be joining the fray last weekend with Finance Minister Christine Lagarde saying that there is a need to "explore better coordination of exchange rate policy."
However, the comments from the BRIC nations have been confused and conflicting and there is little sign that even these four could agree on how to proceed.
If anything, the whole exercise appears designed just to attract attention as the BRIC members make a bid to get a more prominent role in international financial institutions.
Hopes that they might have got the whole issue of diversification on the G8 agenda and even in the communique this week have rapidly faded with the topic being relegated to unofficial discussions in the corridors.
Even the Russian President Dmitry Medvedev appeared to acknowledge the futility of trying to knock the dollar from its position as the global currency of choice. He said that he sees "no alternative" to the dollar at present.
His comments echo those by some Chinese officials, who after suggesting that diversification is needed, have conceded that the dollar remains preeminent.
This gradual reversal is hardly surprising, given the damage that the BRIC countries could inflict on the value of their own reserves if they pursued the diversification issue more aggressively.
Marshall Gittler, chief strategist at Deutsche Private Wealth Management in Geneva, said they are backing away from their original positions "in the realization that it just shoots themselves in the foot so long as they are still holding a large part of their reserves in the dollar."
Also, there is the continued weakness of the global recovery - an issue that is likely to be the key issue of the summit.
As many countries recover only very slowly from the global recession, the last thing they will want is a dollar weakened by diversification talk. This will make their own currencies more expensive and make it more difficult to get a competitive edge in export markets.
"It is in nobody's interest if the dollar depreciates massively," said the currency strategist team at Commerzbank, providing another reason why diversification is becoming less of a relevant issue for G8 leaders or the dollar.
Early Tuesday in Europe, risk aversion continued to drive currency market sentiment with the dollar and the yen reaping the benefits. A brief rally in U.S. equities, following the release of a slightly better-than-expected ISM survey for U.S. non-manufacturers Monday, was quickly reversed in Japan with the Nikkei falling 0.3% Tuesday.
A combination of dovish comments from the Reserve Bank of Australia, warning that it could cut rates again, as well as an admission from U.S. President Barack Obama's economic advisor Laura Tyson that the U.S. economy was in worse shape than anticipated, undermined any optimism.
The market is now focused on whether a series of U.S. Treasury auctions this week will attract much-needed foreign support and whether the start of the second-quarter earnings season will help to lift hopes of corporate recovery.
By 0712 GMT, the dollar was down at Y95.14 from Y95.35 late on Monday in New York, according to EBS. The euro was down at $1.3922 from $1.3980 and down at Y132.51 from Y133.34.
- 7 July |
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