The dollar’s position as the world’s leading reserve currency faces increased pressure as the financial crisis allows emerging economies greater influence on the world stage, analysts said.
A report last week in the Independent claiming that China, Russia and Gulf States are among nations prepared to ditch the dollar for oil trades has heightened the uncertainty surrounding the US currency’s future.
The dollar slumped against rivals last week in the wake of the British daily’s controversial report.
“The US dollar is being hurt by the continued talk of a shift away from a dollar-centric world,” said Kit Juckes, an analyst at currency traders ECU Group.
“Three conclusions stand out very clearly. Firstly, the shift in economic power away from the G7 economies is continuing. Secondly, there is a growing acceptance amongst those winners that one consequence of this power shift will be to strengthen their currencies.
And finally, as long as the US economy is not strong enough for any rise in interest rates to be conceivable for a long time, the dollar’s underlying downtrend will remain in place,” Juckes said.
The Independent, under the front-page headline “The demise of the dollar,” reported on Tuesday that the Gulf states, together with China, Russia, Japan and France, were considering replacing the dollar as the currency for oil deals.
“In the most profound financial change in recent Middle East history, Gulf Arabs are planning — along with China, Russia, Japan and France — to end dollar dealings for oil,” wrote Robert Fisk, the newspaper’s Middle East correspondent.
They would switch “to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Cooperation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar,” wrote Fisk, citing Gulf Arab and Chinese banking sources.
The report was denied by a host of countries, including Kuwait, Qatar and Russia, while France dismissed it as “pure speculation.”
Even so, the UN itself last week called for a new global reserve currency to end dollar supremacy, which had allowed the US the “privilege” of building up a huge trade deficit.
UN Undersecretary-General for Economic and Social Affairs Sha Zukang (沙祖康) said “important progress in managing imbalances can be made by reducing the [dollar] reserve currency country’s ‘privilege’ to run external deficits in order to provide international liquidity.”
Sha was speaking at the annual meetings of the IMF and World Bank, whose president Robert Zoellick recently warned that the US should not “take for granted” the dollar’s role as preeminent global reserve currency.
Meanwhile at a G20 summit in Pittsburgh last month, world leaders unveiled a new vision for economic governance, with bold plans to fix global imbalances and give more clout to emerging giants such as China and India.
Following the summit, US Treasury Secretary Timothy Geithner repeated Washington’s commitment to a strong dollar.
But last week Geithner was left to watch as traders used the Independent’s report as an opportunity to push lower the troubled US unit.
The newspaper report “has helped concentrate the minds of traders and investors alike, and has given them another excuse to take the dollar lower,” GFT Global Markets analyst David Morrison said.
“Despite what the Fed and other central bankers say, a weaker dollar is desirable because it is necessary to rebalance the global economy,” he said.
“As long as the decline is gentle and orderly, then they’re happy. But aggressive selling would spook the markets,” he said.
Commerzbank currency analyst Antje Praefcke agreed that the market’s reaction was significant because it showed that the dollar was on a downward trajectory.
“The questionable article in the Independent was of course disclaimed,” Praefcke said. “It is nonetheless an interesting study of the pscychological factors which are currently putting pressure on the dollar. Even if conspiracy theories turn out to be nonsense, the dollar is subsequently able to retrace only some of its losses.”
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