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The dollar's trial by fire.

The issue of reserve currencies and the reform of the international monetary regime will probably not take place at the Group Eight Summit (G8) with the so-called Group Five (G5) nations, despite the calls from China and other countries, according to industry experts.

"The Central bankers do not attend the G8 meeting, and finance ministers are often loath to discuss currencies without them," Marc Chandler, Global Head of Currency Strategy from Brown Brothers Harriman, told IBTimes.

Chandler added that the topic will no doubt be discussed "in the halls and sidelines of the meeting".

"However, most officials (from Russia, China, Brazil and Japan) who have spoken on the topic recognize that reform of the international monetary regime will take years to achieve," Chandler added.

Concerns for the dollar have been increased by the global financial community due to the combination of increased budget deficits, continued current account deficits and quantitative easing by the Fed.

Members of the G8 including key foreign government lenders are paying attention, but still not taking any serious action, James DiGeorgia, the Gold and Energy advisor told the reporter.

"They're still buying into the promises and assurances from both the Federal Reserve and Treasury Department," DiGeorgia said, but adding that "dollar is declining so much that there is going to be a monetary panic of unprecedented size"

"When the dollar fundamentals are questioned, calls for a more diverse monetary system will occur." Mark Rzepczynski, founder and managing director of Lakewood Partners told the reporter.

According to Rzepczynski, the global financial balance of power is changing regardless of how the recovery occurs. The economic shift away from the G8 to the broader set of countries will also see a shifting role for the dollar.

Central banks will continue to "conservatively" diversify their assets holdings. Further development in global financial liquidity will accentuate these trends, Rzepczynski said.

However, Chandler holds a different point of view, saying the dollar's role as the main reserve currency and the numeraire for the world economy has hardly changed over years.

Chandler noted that the International Money Fund (IMF) is the most authoritative source for the currency allocation of reserves, and the IMF's most recent data, covering through Q1 09, found that the dollar's share of world reserve increased in Q1 and now stands at its highest level since 2007.

He explained that OPEC continues to use the dollar as it benchmark, despite Russia, Iran and Venezuela offer to sell oil for non-dollar currencies.

"Look at what officials are doing not what they are saying," Chandler said.

In the H2 08, China increased its Treasury holdings by 38% and continued to buy through the first quarter 2009 before turning modest sellers in April (the most recent Treasury data). Russia, Brazil and India also tend to be regular buyers of Treasuries despite their echo to the challenge of U.S. dollar for a diversified currency system.

"There is no evidence that central banks have diversified reserve holdings," Chandler said.

"Leaving aside the distortions caused by the run-up to Economic and Monetary Union (EMU), the dollar's share of global reserves (whose allocations are reported) has remained relatively stable around 2/3," Chandler said. "The euro is essentially the sum of its parts: the ECU, mark and franc. These three accounted for about 25% of the world's reserves in 1990 and account for about the same today," he added.

Despite the call from China, or rather, China's central bank officer, to take the IMF's special drawing rights (SDRs), as a viable alternative for reserve currency in the future, other Chinese officials, include the ambassador to the US says it was just intellectual musing.

"Because the SDRs is not money buy claims on members ‘s currencies, it is highly unlikely to be a viable alternative to the dollar." Chandler said.

He mentioned that if central banks wanted to they could adopt the reserves in proportion that they are represented in SDRs, but not a single central bank does so.

"SDRs as a significant reserve currency or as a integral part of a new international monetary order that supplants the dollar is simply a non-starter as currently constructed." Chandler said.

Chandler said the international monetary regime changes, if it will come, would most likely be measured in decades rather than years.

"There are two ways I can see the international monetary regime changing: U.S. abdicates (I see no sign of that happening), or there was a clear alternative."

However, no apparent alternative has come out yet.

According to Chandler, Europe is too pre-occupied with its own integration, nor does it look like it has the will. China is said not to have a convertible currency and lack transparency in economic system. The capital markets are not deep enough.

Even though the dollars role may not be threatened for now, there is still a long way to go for it.

With a federal deficit of almost $74 trillion, the treasury keeps printing more and more money, an action driving the dollar's value downward.

DiGeorgia sees the U.S. economy and currency "in great danger", worrying the next big shoe to drop is a dramatic shortfall in Federal and State Tax revenues. It will be exacerbated in 2010 when much higher taxation hits the U.S. consumer. Deficit estimates for 2009 through 2011 could be off by as much as 40%.

DiGeorgia says commodities such as gold are going to skyrocket as a result of the monetary debasement.
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Publication:International Business Times - US ed.
Article Type:Conference news
Geographic Code:9CHIN
Date:Jul 10, 2009
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