THE challenge to the US dollar’s supremacy in the global financial system is nothing new. Since a few years ago, there have been talks that the greenback’s days as the world’s reserve currency are indeed numbered; even as some politicians, including Malaysia’s former prime minister Tun Dr Mahathir Mohamad, have previously called for the abandonment of the US dollar as the main trading currency.
But lately, the challenge to the US dollar’s status in the international market has intensified, with China leading the call for the creation of a new global reserve currency to replace the greenback.
The emerging superpower recently urged the International Monetary Fund (IMF) to move towards a super sovereign reserve currency and expand the use of special drawing rights (SDRs).
(SDR is an international reserve asset created by the IMF to supplement the existing official reserves of its member countries. The value of SDR is based on a basket of key international currencies, including the US dollar, euro, yen and the pound sterling.)
Backing China’s call for an alternative global reserve currency are Russia as well as the central banks of Indonesia, Thailand and Malaysia.
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz was quoted in Bloomberg as saying that it is a viable proposal that should be considered, while Bank of Thailand governor Tarisa Watanagase believed having an alternative to the US dollar could benefit developing countries.
Over the week, Venezuelan President Hugo Chavez also took a swipe at the US dollar’s global prominence by suggesting a new, oil-backed currency, simply known as “petro-currency”.
The fading support for the US dollar reflects rising international concern that the value of the greenback could be destabilised by the US government’s expansionary policies to lift the country out of recession. This is because any destabilisation of the greenback’s value could disrupt the functioning of the global financial system, which is currently based on the US dollar.
The international pressure facing the US dollar is real. But like it or not, the US dollar, which took over the role as an international reserve currency from the pound sterling after World War II, is still king, and it is not likely to be replaced any time soon.
Fitch Ratings head of Asia James McCormack tells StarBizWeek that establishing an alternative to replace the US dollar as the world’s reserve currency is a long and gradual process.
RAM Holdings Bhd chief economist Dr Yeah Kim Leng concurs, saying it is difficult to replace the US dollar in the immediate term.
McCormack also points to the fact that the world’s commodities are all priced in US dollar, hence any adjustment will take an even longer time.
But China’s proposal for a new global currency benchmark should not be taken lightly. Economists believe that the proposal could lead to further serious debate over the role of the greenback.
Yeah says the Chinese government’s suggestion has brought greater awareness to the international circle of the urgent need for a global financial reform.
He believes that the platform has been set for major powers to look into an alternative benchmarking system to bring about global financial stability.
Of late, the US dollar has been strengthening against major currencies, and this is due mainly to the global trend of deleveraging and repatriation of funds. But the strength of the US dollar is not sustainable and economists expect other currencies to adjust higher against the greenback towards the end of the year.
Maybank Investment Bank Bhd (Maybank IB), in its report, says bad fundamentals will eventually catch up with the US dollar.
Large current account deficits, low savings, a contracting economy and zero interest rates spell huge problems ahead for the US dollar.
To date, China is the largest holder of US debts in the world with about US$740bil worth of US securities as its assets. Being the largest economy in the world, the United States has been able to absorb the excess savings, particularly that of East Asia, over the years to finance its deficits.
But the tide is expected to turn soon for the United States. MaybankIB says the United States will find it increasingly difficult to tap the savings and trade surpluses of the rest of the world to finance its burgeoning fiscal deficits over the next few years, given the weaknesses surrounding the country and its currency.
According to Yeah, the emphasis now should be on ensuring that a currency’s volatility does not impede or disrupt global trade and investment.
Towards this end, China has exerted its influence on the global economy.
Since late last year, the People’s Bank of China has signed bilateral currency swap arrangements worth up to 650 billion yuan (RM348bil) with central banks of South Korea, Hong Kong, Malaysia, Indonesia, Belarus and Argentina to promote trade and investment.
The arrangement between China and Malaysia is worth 80 billion yuan (RM43bil), with an effective period of three years that could be extended by agreement between the two sides.
(A currency swap is an agreement whereby two countries agree to exchange a given amount of currency at an agreed upon interest rate and a common maturity date for the exchange.)
China has announced its plans to further expand the use of currency swap with other countries to promote trade and investment.
The move will lead to a wider usage of the Chinese currency – which cannot be freely traded currently on the international market – in global trade. – The Star
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