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US 'has to clean up dollar mess'
By Wang Xu (China Daily)
Updated: 2009-03-26 07:28

US President Barack Obama may have dismissed the need to replace the greenback with a global currency, but economists said yesterday that he should take more steps to restore confidence in the dollar, especially in the near term.

Obama said at a White House press conference on Tuesday evening (yesterday morning, Beijing time) that confidence in the US economy and the dollar was "extraordinarily strong", and that he did not believe there was a need for a global currency.

Obama's comments came after China's central bank governor Zhou Xiaochuan wrote in an article that it was necessary to create a "super-sovereign reserve currency" to overhaul the existing international monetary system of using the currency of one nation as the global reserve currency.

Zhou suggested that the International Monetary Fund's (IMF) Special Drawing Rights (SDRs), a currency basket comprising the dollar, the euro, the pound and the yen, had the potential to serve as a super-sovereign reserve currency. The SDRs have been used as a unit of account among IMF members and other international organizations since introduction in 1969.

Even before Zhou's remarks, a UN panel of financial experts had suggested that the world ditch the dollar in favor of a shared basket of currencies, Reuters reported. That was followed by Russia saying it would pitch for a new reserve currency at the G20 summit to be held in London on April 2.

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"Despite all the talk of 'confidence', investors are still deeply concerned about their holdings of the US dollar and Treasuries, not only in China, but around the world," said Erh-Cheng Hwa, chief economist of the Bank of Communications and a former IMF economist.

"Zhou's proposal, along with others', could add more pressure on the US government to take real responsibility to clear up the mess it has created."

The US currency and Treasuries dominate the holdings of central bank reserves around the world. It is estimated that 70 percent of China's $1.95 trillion in foreign exchange reserves is invested in US dollar-denominated assets; and a depreciation of the greenback would hurt the central bank's balance sheet.

The US has run up budget and external deficits over the years to fuel its consumption spree, thanks to the dollar's status as the reserve currency. But this has also weakened the currency during the process.

Some analysts estimate that the Obama administration's massive bailout plan, with an even higher budget deficit, is likely to further weaken the dollar and give rise to global inflation.

Hwa said the proposals by Zhou and others could help bring about a perfect storm that would reshape the international monetary system in the long run. But it could take years to persuade private companies to use SDRs for international trade and commodity pricing; and opposition from the US is a major obstacle.

"The existing international monetary system is out-of-date," said Wang Jianye, chief economist of the Export-Import Bank of China and former IMF economist. "It does not reflect the profound changes in the world econom and hence is no longer workable."

Wang said the essence of Zhou's article was to "find appropriate mechanisms" to ensure that the US takes into account the global effect of its monetary policy in the short term and help move toward a new global monetary system conducive to sustainable growth in the long run.