U.S. Dollar in the Crosshairs Ahead of G-20 Summit

By Patrick Goodenough | March 25, 2009 | 4:20 AM EDT

A bank employee prepares banknotes in southwest China's Sichuan province on March 21, 2009. China is calling for a new global currency to replace the dominant dollar. (AP Photo)

(CNSNews.com) – In the run-up to next week’s G-20 summit in London, developing countries led by China and Russia are stepping up calls for the U.S. dollar to be pushed aside as the main global reserve currency.
China’s central bank governor, Zhou Xiaochuan, suggested this week that reforms to the international monetary system include the long-term goal of an international reserve currency not connected to an individual nation. China is the biggest holder of U.S. dollar assets and is concerned about the currency’s volatility.
A few days earlier, the Russian government put forward among its G-20 summit priorities a proposal for the International Monetary Fund (IMF) to explore the possibility of creating a “super reserve currency accepted by the whole of the international community.” Russia said the proposal had broad support among other emerging economic powers, including Brazil, India and South Korea.
The Kremlin said its proposal could be pursued either through the creation of a new global reserve currency or through the use of the IMF’s existing Special Drawing Rights (SDR), a reserve asset set up in the 1960s and used only by governments and some international institutions. The SDR is not itself a currency; its value is based on a basket of four currencies – the dollar, euro, pound sterling and yen.
In his recommendations, which were posted in the form of an essay on the bank’s Web site, Zhou also cited the SDR, saying it had the features and potential to act as a super-sovereign reserve currency.  But, he added, “the basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies.”
China has long been pushing for changes to the global financial system, to give a bigger say to China and other leading developing economies at the world’s financial institutions – a line it is expected to hold at the London summit.
According to Xinhua, China’s foreign exchange reserves hit a record 1.95 trillion U.S. dollars at the end of 2008, the largest in the world. As of January, it held U.S. Treasury bonds worth some $740 billion.
Earlier this month, Chinese Premier Wen Jiabao voiced concern that Washington’s economic stimulus efforts could undercut the currency’s value.
Zhou’s proposal was quickly rejected by President Obama at Tuesday’s prime-time press conference, and by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke on Capitol Hill earlier in the day.
“I don’t believe that there’s a need for global currency,” Obama said, while Geithner and Bernanke both replied in the affirmative when asked during a congressional hearing whether they would “categorically renounce the United States moving away from the dollar and going to a global currency.”
The global economic crisis has prompted other calls around the world to consider alternatives to a dollar-based system.
A Japanese think tank with government links this month proposed the establishment of a common Asian currency, on a par with the dollar and euro.
At a summit of the Economic Cooperation Organization two weeks ago, Iranian President Mahmoud Ahmadinejad, declaring the capitalist system to be “on the verge of collapse,” suggested the adoption of a common currency for trade among the 10 members of the Eurasian group, which include Turkey, Pakistan and Central Asian republics.
It was not the first time Ahmadinejad had taken a swipe at the U.S. currency. He and his Venezuelan ally, President Hugo Chavez, have pressed within the Organization of Petroleum Exporting Countries (OPEC) for oil to be priced against a currency – or a basket of currencies – other than the dollar.
Their proposal has come up against opposition within OPEC, led by Saudi Arabia.
Some Gulf oil states, meanwhile, are grappling with calls to stop pegging their own currencies to the greenback. Kuwait in 2007 became the first to do so.
Leading member states of the Gulf Cooperation Council have long planned a common currency for the oil-exporting region, although officials this week pushed back a 2010 deadline for the launch.
Patrick Goodenough
Patrick Goodenough
Spencer Journalism Fellow