Dollar stability 'key to recovery'

2009-09-25 13:49

Pittsburgh - China called on the United States Thursday to ensure the stability of the weak US dollar, saying it was critical to global recovery driven by trade in the key reserve currency.

While showing apparent concern over the status of dollar, which dived to a year low against the euro on Wednesday, a Chinese central bank official said Beijing remained supportive of the dollar.

"Since US dollar is a major reserve currency and a major trade settlement currency, the stability of the US dollar has a key influence on the stability of the world economic recovery," said Xie Duo, director general of the People's Bank of China on the sidelines of the Group of 20 summit in Pittsburgh.

"We support the stability of major reserve currencies."

But Xie reminded the United States not to allow its "domestic policies" to damage the reputation of the greenback as an international reserve currency.

The US government has to strike a balance between these two functions," he said.

Xie was answering a question on the impact of the embattled dollar on Chinese exports as well as its $800bn US Treasury bond holdings and more than $2 trillion in dollar reserves.

Before Xie spoke, Treasury Secretary Timothy Geithner reaffirmed Washington's strong-dollar policy Thursday, saying: "A strong dollar is very important to the United States."

Underscoring Beijing's concern over the dollar's weakness, Xie said the Chinese central bank and other Chinese government agencies "are watching very closely where the US dollar is headed.

"We are also analyzing the causes of this and making our own assessment on the future exchange rate of the US dollar."

The dollar issue has become a subject of debate at the G20 as US President Barack Obama and other leaders of the forum consider a new framework for tackling the so called global "economic imbalances" blamed for fuelling the latest financial crisis.

Some argue that the latest financial crisis resulted from imbalances between savings and investment in major economies, which have led to large current deficits, as evident in the United States, and surpluses, as enjoyed by China.

Beijing was the first to call for a new global currency as an alternative to the US dollar as the US deficit rocketed - the White House estimates it could reach $9 trillion over a decade.

Chinese Premier Wen Jiabao expressed concern as early as March over the safety of his country's massive US bond holdings that virtually made China the largest creditor to the United States.

Then, Chinese central bank governor Zhou Xiaochuan, who supervises more than $2 trillion worth of dollar reserves, the world's largest, raised the stakes by calling for a new reserve currency in place of the dollar.

He wanted the new reserve unit to be based on the SDR, a "special drawing right" created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.

"These countries realise that they would suffer losses if inflation eroded the value of the dollar securities they own," said Richard Cooper, a professor of international economics at Harvard University.

But he said there were no feasible alternatives to the US dollar as a widely used international currency, discounting even IMF's synthetic SDR currency, comprising a basket of the dollar, euro, yen and the pound.

The dollar will remain the dominant world currency, thanks to the stability of our political system and the rule of law that isn't a feature of many other economies," said Irwin Stelzer, director of economic-policy studies at the Washington-based Hudson Institute.