Markets will be keeping a close eye on today’s meeting of finance ministers from the Group of Seven leading industrial nations to see if they go beyond the normal platitudes about currencies and try to support the dollar, which has been sold off heavily in recent weeks.
The dollar has been in focus since figures earlier this week from the IMF showed that its share of total reserves has fallen to its lowest level since 1995 and the head of the World Bank warned that its status as the world’s leading reserve currency should not be taken for granted.
The figures tapped into a feeling that the dollar’s central position in the international monetary system was in long-term doubt, and that further declines in its value could threaten the fledgling global economic recovery. The worries are in part based on much larger US budget deficits and expansive monetary policy at the Federal Reserve, including rock-bottom interest rates and expansion of the money supply.
Neil Mackinnon, global macro strategist at VTB Capital in London, said it’s “highly likely” that the finance ministers, including US Treasury Secretary Timothy Geithner, would try and talk up the US currency.
The dollar earlier this week fell to an eight-month low against the yen and is not that far away from one-year lows against the euro.
On Thursday the dollar rose about US$0.01 against the euro, which reached US$1.4536. The dollar was unchanged against the Japanese currency on the day at ¥89.59.
“It’s in the Americans’ interest as well to have a stable currency,” Mackinnon said. “A dollar crisis is the last thing anyone needs.”
Regardless of whether the G7 finance ministers actually take verbal steps to support the dollar, the currency’s long-term status as the world’s reserve currency is clearly under the spotlight.
Earlier this week, World Bank president Robert Zoellick cautioned US authorities against assuming the dollar would maintain its role as the world’s reserve currency as they deal with the fallout from the financial crisis and the deepest recession since World War II.
Zoellick said other currencies such as the euro and the yuan could win increasing acceptance in international currency markets.
The US “would be mistaken to take for granted the dollar’s place as the world’s predominant currency. Looking forward, there will increasingly be other options to the dollar,” he said.
“The future for the United States will depend on whether and how it will address large deficits, recover without inflation that could undermine its credit and currency, and overhaul its financial system,” Zoellick told an audience at Johns Hopkins University in Washington on Monday.
The IMF figures provided evidence that changes are afoot — they showed that the dollar accounted for 63 percent of total allocated currency reserves in the second quarter, down from 65 percent in the previous three months, while the euro’s share of reserves rose to 27 percent from 26 percent.
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