EU rejects proposal for new reserve currency

Euobserver.com writer Andrew Willis wrote a piece on 25 March that the “EU rejects proposal for new reserve currency“.

“Everybody agrees also that the [main] present world reserve currency, the dollar, is there and will continue to be there for a long period of time,” said Mr Almunia after a meeting of commissioners in Strasbourg reports the Associated Press.

China’s call for a new reserve currency reflects fears that its huge stockpile of dollar denominated US treasury notes, amounting to roughly half of its $2 trillion (€1.49trn) in foreign reserves, is in danger of being devalued.

China had proposed to replace the dollar as the world reserve currency with an IMF accounting unit called the Special Drawing Rights (SDRs). The SDRs are based upon a “basket of currencies” consisting of the US dollar, the yen, the sterling and the euro. The proposal would expand this basket with other currencies, though.

China has become more outspoken about reforming the IMF. Russia has also argued for a new reserve currency that would be based upon SDRs. Iran already now demands euros over dollars for oil. Expect opposition to the dollar as a reserve currency to escalate if a world depression continues. The length of economic difficulties will likely influence how fast this happens. Once the US dollar is no longer the reserve currency, creditors will become much more likely to dump the dollar and demand settlement. The economic impact upon the US cannot be overstated. It will bring the end to the US as a superpower.

Just to contrast various reactions, the Bangkok Post reports in “New reserve currency talks ‘legitimate’“:

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

Earlier British Prime Minister Gordon Brown brushed off China’s call for a new global reserve currency instead of the dollar, saying it would not be a major topic for next week’s G20 summit.

It is notable that Great Britain would be the one to brush off the suggestion.

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