IMF aide remarks favorably about new reserve currency

Section:

IMF Says New Reserve Currency to Replace Dollar Is Possible

By Alexander Nicholson
Bloomberg News
Saturday, June 6, 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUYeJEwZaQrw

The International Monetary Fund said it's possible to take the "revolutionary" step of creating a new global reserve currency to replace the dollar over time.

The IMF's so-called special drawing rights could be used as the basis for a new currency, First Deputy Managing Director John Lipsky told a panel discussing reserve currencies at the St. Petersburg (Russia) International Economic Forum today.

"There are many, many attractions in the long run to such an outcome," Lipsky told a panel discussing reserve currencies at the St. Petersburg International Economic Forum today. "But this is not a quick, short, or easy decision," he said, adding that it would be "quite revolutionary."

The SDRs would have to be delinked from other currencies and issued by an international organization with equivalent authority to a central bank in order to become liquid enough to be used as a reserve, he said.

As much as 70 percent of the world's currency reserves are held in dollars, according to the IMF, leading to calls for nations to diversify their cashpiles to avoid excessive exposure to the U.S. economy as it quadruples its budget deficit in a bid to counter the worst recession since the Great Depression.

The dollar fell on June 3 to its lowest level in 2009 against the euro on concern that the ballooning deficit would sap demand for Treasuries among foreign investors and central banks.

"The largest debtor is very unlikely to dominate any currency arrangement today," said Ousmene Mandeng, head of Ashmore Investment Management Ltd.'s public sector investment advisory.

President Dmitry Medvedev yesterday questioned the U.S. dollar's future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. Russia has proposed regional reserve currencies, including the ruble, as part of a response to the global financial crisis.

"It's an oddity that on the one hand we have an increasingly multipolar international economy, an increasing commercial diversification, and on the other hand we have a unique concentration in terms of monetary transactions," Mandeng said. "That in itself creates a lot of instability."

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