♠ Posted by Emmanuel in Credit Crisis at 7/06/2009 01:59:00 PMThat the fate of the US dollar is largely in the hands of foreign creditors is a truism by now. Despite feigning concern about the dollar's inevitable decline, China has not really stopped piling on greenbacks--that much is clear. In China's latest salvo, it is actually countering calls by France and Russia to discuss the matter of the dollar prior to the upcoming G-8 meeting. In the process, it is making some odd comments about the debate on Chinese dollar accumulation being "academic" instead of "official" when it was, after all, their central bank governor that pointedly asked about the dollar's fate. From Reuters:
France and Russia on Sunday urged a debate about the world's reserve currencies, but China said the dollar would keep its pre-eminence for "many years to come." Beijing, which has floated the idea of an alternative to the dollar as global reserve currency one day, wants the matter discussed at this week's G8 summit in Italy, officials say.Then we return to this "strong dollar" nonsense:
But in remarks that appeared intended to reassure Washington, Chinese Vice Foreign Minister He Yafei told reporters in Rome: "The U.S. dollar is still the most important and major reserve currency of the day, and we believe that that situation will continue for many years to come. "You may have heard comments, opinions from academic circles about the idea of establishing a super sovereign currency. This is all, I believe, now a discussion among academics. It is not the position of the Chinese government."
China's central bank head launched the debate last March when he said the SDR, the International Monetary Fund's unit of account, might one day displace the dollar. The debate is highly sensitive in financial markets, which are wary of risks to U.S. asset values. Bankers reckon China holds perhaps 70 percent of its $1.95 trillion in official currency reserves in the dollar.
Several emerging market countries have said they want to reconsider the dollar's role and see a more diversified international monetary system. "The dollar system or the system based on the dollar and euro have shown that they are flawed. But I am a realist and I understand that today there is no alternative to the dollar or the European currency," Russian President Dmitry Medvedev said in an interview with Italian media. "There should be more reserve currencies. So we consider that we need to think about the creation of regional reserve currencies."
European Central Bank Jean-Claude Trichet said it was important that the United States stayed committed to a strong currency. "On this issue, I am very, very clear. I have just one message ... It is extremely important that the United States of America ... has been ...saying that a strong dollar is in the interests of the United States of America," Trichet said. "I consider that extremely important and I welcome this declaration," he added.My opinion is unchanged: the dollar is utter rubbish. Anyone holding it--including myself, of course--deserves whatever he or she gets when an essentially insolvent country is caught out for good. If China and Co. are unwilling to give the US tough love (whupping?) it so deserves, then things will just keep mounting for an even more calamitous endgame. Mark my words, this "global financial crisis" is just child's play. As Forrest Gump would say, stupid is as stupid does in accumulating dollar rubbish.
France's Economy Minister Christine Lagarde told reporters at a conference: "We should explore a better coordination of foreign-exchange policies, which would raise the question over the medium term of the balance of exchange rates and the role of currencies that have changed both as a result of the crisis and the role played by emerging market countries."
On Friday, Suresh Tendulkar, chairman of the Indian prime minister's economic advisory council, said the dollar's weight in the basket of currencies that helps set the rate of India's partially convertible rupee currency may be reduced. Up until now, the U.S. dollar had been considered the main reserve currency in India. However, "India may change," he said.
"I think if you look at the global imbalances that were being talked about today between the surpluses (of) China and Japan and the deficits of the United States, I think that needs to be corrected. That I think is clear, Tendulkar said at the conference in Aix-en-Provence, France. Asked whether the U.S. dollar should be weaker, he said: "I think it is necessary ... it should go down."
Asian Development Bank President Haruhiko Kuroda, however, said on Sunday it was important that global imbalances be unwound gradually.
PS: You might want to see another recent Reuters article on the yuan's supposed journey to reserve status that I'm afraid is not very informative. Time permitting, I will discuss more tangible manifestations of yuan diplomacy, such as Beijing's approaches to its Southeast Asian neighbors.