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.

From Bloomberg:

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

Comments

[Tannim]

There already IS a supercurrency out there--gold and silver.

Be nice if we'd actually use it again.

[morrisonbonpasse]

The markets should "know" that an international monetary system anchored
to the currency of one country needs to be reformed. What is needed is a
Single Global Currency, managed by a Global Central Bank within a Global
Monetary Union. The success of the euro shows that monetary union is the
best way to ensure monetary stability. The primary problem with the euro
and currencies of other monetary unions is that they still must co-exist
within the international multi-currency system itself where the value of
those common currencies must still fluctuate in value against each other.
With a Single Global Currency, there are no such fluctuations, by definition.
If 16 countries can use the same currency, why not 192?
In addition to eliminating currency fluctuations, the use of a Single
Global Currency would eliminate the current foreign exchange trading
expense of $400 billion annually, eliminate currency risk, eliminate
current account imbalances, eliminate the need for foreign exchange reserves (now totaling more than $3 trillion); and bring other benefits worth trillions, such as reducing the impact of global financial turmoil as we
are now experiencing.
The Single Global Currency Assn. (www.singleglobalcurrency.org)
promotes the implementation of a Single Global Currency by 2024, the 80th
anniversary of the 1944 conference. That’s only 15 years away.
The world is moving toward a Single Global Currency through the
creation, expansion and merger of regional monetary unions. Another
route is through international monetary conferences proposals and agreements, such as were seen at Bretton Woods. The challenge now is to reach that goal planfully, as soon as possible with as little cost and as few crises as possible. The transition should be as smooth as the transition to the Euro at the turn of the century.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine

[Amit]

Gold is the hedge against inflation but if you want to participate in the global economy today which means participation in US dominated export/import, then you need the dollar. China is stuck with dollars in its reserves that will take a decade or more to work of its balance sheets without complete catastrophe for their economy and the world economy. A catastrophe the US will be the first to escape and China the last. China can easily reduce its accumlation of dollars by slowly floating its currency and letting it revaluate to a higher level against other currencies. I think this will be their response over time. Everything else is politics with no long term consequences.