In the lead-up to next week’s G8 summit, the Chinese have been making yet more noises about setting up a new monetary system without the dollar as its anchor and leading reserve currency. The Chinese, who have maintained a export orientation which has made them the largest holder of U.S. government bonds, are concerned that they are holding depreciating assets. As the U.S. economic and fiscal position deteriorates, the likelihood for a disorderly decline in the U.S. dollar increases. So, China wants a change.
The Japanese, who also have the same export orientation, making them the second largest holder of U.S. treasury assets, have come America’s defense.
Major countries should support the dollar as the key international currency, although emerging nations may discuss a new global reserve currency on the sidelines of the G8 summit next week, a Japanese official said on Friday.
China has asked for debate on a new global reserve currency when leaders from the Group of Eight (G8) meet with the G5 emerging economies next week in Italy, G8 sources told Reuters. News of the Chinese request pushed the dollar down to a three-week low on Wednesday.
But Japan thinks it would be difficult for another currency to replace the dollar as the world’s global reserve currency and it is against any move that would unnecessarily weaken the status of the dollar, said Yoichi Suzuki, director-general of it is against any move that would unnecessarily weaken the status of the dollar, said Yoichi Suzuki, director-general of the Japanese foreign ministry’s economic affairs bureau and one of the country’s main coordinators for the G8 summit.
“Japan’s stance is that major countries should support the dollar,” Suzuki told Reuters in an interview.
“It won’t benefit any country to talk about ideas of a new global key currency, which would weaken the dollar,” he added.
And Suzuki is right. Yes, I believe the dollar is a weak currency over the long-term due to structural imbalances. But, there is no currency to replace it as a reserve currency right now. The Euro is a new and artificial construct. It is facing its first real test as signs of tension are rising in the Eurozone due to the global downturn. The economies supporting the Yen, the Pound Sterling, and the Swiss Franc are all too small. And the Renminbi is not fully convertible. George Soros has said “the dollar is a very weak currency except all the others.”
So, it makes no sense to talk the dollar down here and now and risk a disorderly fall. It certainly is not in China’s best interest as all their U.S. dollar assets will lose value. But, the Chinese have been talking down the dollar as a reserve currency for months now – and their tone seems ever more shrill on this topic. Perhaps the Chinese see their dollar holdings as a sunk cost. Perhaps the Chinese have moved on and are ready to decouple from an over-indebted America, which cannot continue to run massive deficits now that crisis has hit.
Next week, we will get hints because G-8 members will have every opportunity to make this an issue at the upcoming summit.
Originally published at Credit Writedowns and reproduced here with the author’s permission.