Monday, 30 March 2009

Bye bye US Dollar as reserve currency - may have to wait for another panic induced epiphany

The recent maneuvering by the Chinese government with respect to a new global reserve currency is attracting a lot of attention and, as I have previously suggested, it may be an idea whose time has (almost) come.
However implementation details are certainly not likely to be part of any substantive agenda any time soon I suspect. Just a quick thought on how, if there is to be such a development, it might proceed. I do not agree with the approach suggested in this following comment.
Transition to a basket of currencies still looks tricky, but if central bankers cooperated, such a shift could be accomplished without massive disruption of trade or currency relativities. The G20 central banks could agree to hold their currencies within set bands in relation to each other and to ban various forms of speculative currency trading. This would damp down market movements and give time for the details of a currency basket to be thrashed out.
I think that a slow transitional process towards fixing cross rates for a new currency based on the SDR or a new basket would not be the way to go. It would need to be a one time decision as happened with the establishment of the Euro at the end of 1998 where conversion rates were fixed irrevocably by the EU parliament even though there was a period during which the old currencies were still accepted as legal tender.

For one thing central banks are not good at managing currencies within bands - the ERM illustrated that.

At present It would be a horrendously tough negotiation to fix the rates and for that reason - amongst others (i.e. the US will fight the proposal tooth and nail) - it will almost certainly be kicked into the long grass at the G20 meeting this week.

If there is to be a replacement for the USD (and perhaps Keynes was on the right track with the bancor) one suspects that it may have to wait until there is another super critical event before the politicians will, in moments of panic induced epiphany, see the wisdom of it.

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