A global 'super currency' to replace the buck? No, but . . .
On a day when the dollar had every right to rally given surprisingly upbeat U.S. economic data, Treasury Secretary Timothy F. Geithner briefly knocked the greenback for a loop.
From Bloomberg News:
Geithner was initially asked at a Council on Foreign Relations event in New York about proposals from People’s Bank of China Gov. Zhou Xiaochuan for a new international reserve currency. Geithner said, “As I understand his proposal, it’s a proposal designed to increase the use of the International Monetary Fund’s ‘special drawing rights.’ And we’re actually quite open to that.”
Some currency traders suddenly choked, reading into Geithner’s comments that the U.S. was “open to” the idea of a new currency that might someday usurp the dollar’s role as the preeminent holding of governments and institutional investors worldwide.
Within minutes of Geithner’s remarks, the dollar slid. The DXY index, which tracks the dollar’s value against six major currencies, fell 1.2% before stabilizing and creeping back up. The euro surged to $1.365 from $1.345.
Roger Altman, who worked with Geithner as deputy Treasury secretary in the Clinton administration, later asked Geithner whether he wanted to “clarify” his remarks.
"I’d like to ask one final question, in effect on behalf of the market,” said Altman, founder of Evercore Partners Inc. “Let me ask the question this way: Do you see any change over the foreseeable future in the basic role of the dollar as the world’s key reserve currency?”
Geithner responded by saying that “I think the dollar remains the world’s dominant reserve currency.”
Later, on CNBC, Geither reverted to the boilerplate line that Treasury secretaries have mouthed forever, which is that a “strong dollar” is in "America's interest." The DXY index ended the day just slightly lower than on Tuesday.
China's idea for a sort of "super currency" based on a basket of major currencies shows its ongoing concern about the money it has invested in U.S. securities amid record borrowing by Uncle Sam. If the greenback’s value were to collapse, it would take with it China's massive holdings of dollar-denominated assets, including Treasury bonds.
Unfortunately for the Chinese, it would be no snap to create a new global super currency, even if everyone thought it was a good idea.
As for using the IMF’s special drawing rights, currency strategist Marc Chandler at Brown Bros. Harriman & Co. notes that an SDR “is not money in the commonly used sense of a means of exchange or a store of value. It is primarily a unit of account" -- a way nations can settle up trade balance surpluses and deficits, for example.
In other words, there’s no danger anytime soon of the world’s wallets, bank and investment accounts being stuffed with SDRs rather than dollars.
But in their role as the U.S. Treasury's single biggest creditor, the Chinese have put America on notice: They're worried about their money, and they aren't going to be shy about telling us so.
-- Tom Petruno
Photo credit: Karen Bleier / AFP Getty Images