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Leaders won't stop contemplating easing out of the dollar

Section: Daily Dispatches

Dollar's Role Under Debate in Run-Up to G-8 Summit

By Gabriele Parussini
Dow Jones Newswires
via The Wall Street Journal
Sunday, July 5, 2009

AIX EN PROVENCE, France -- France, Russia, and India questioned the role of the dollar as the world's reserve currency during the weekend, indicating its status is likely to be a strong talking point in this week's Group of Eight leading nations' summit in Italy.

At a conference here this weekend French Finance Minister Christine Lagarde called for better foreign exchange policy co-ordination, hinting that the dollar's role as a reserve currency may need to be discussed in the medium term.

Her remarks were echoed Sunday by European Central Bank board member Christian Noyer, who said: "We must ensure a bigger stability between currencies in the coming months."

"We must avoid ... the piling up of currency reserves," and find more efficient ways of financing global trade, he added.

Also calling for change was Russian President Dmitry Medvedev, who said there should be regional reserve currencies -- although he admitted there's no alternative to the dollar and the euro at present.

In remarks to Italian journalists ahead of his trip and released by the Kremlin, he said new reserve currencies were needed but they "can't be introduced by presidential decree or by order of the central bank. It's about trusting countries' economies."

The G8 leaders will, starting Wednesday, meet with each other in the earthquake-hit city of L'Aquila and then meet the leaders of major developing economies. China has been lobbying hard for a debate on the dollar's status at the meeting but other nations have also been saying discussion is needed.

What's not yet clear is whether this campaign could lead to the creation of a new international reserve currency or just a diversification out of dollars into other currencies. It's also not clear whether the G8 and other related meetings this week are likely to yield any progress because it's a meeting of national leaders -- and currency issues are usually the purview of central bankers, finance ministers, and the International Monetary Fund.

The ongoing debate about the dollar has been destabilizing the dollar's value on foreign exchange markets. Traders and investors fear that if the dollar loses its status as the world's reserve currency then global demand for the currency and associated assets such as Treasuries will ease off.

Strong criticism about the dollar's status has caused the dollar's value to at times lurch downward and this has created a "dollar trap" for countries such as China, which holds about $760 billion of Treasuries. Their lobbying campaign risks pushing down the value of their portfolio.

The European Central Bank is weary of volatility in the global foreign exchange system, particularly in the euro/dollar rate, and is concerned that a fall in the dollar, and symettric rise in the euro, would undermine the Eurozone's economic recovery. European Central Bank President Jean-Claude Trichet Sunday reiterated his calls for the U.S. to affirm a strong dollar policy, which could be one way of limiting the dollar's slide.

Adding to the debate, an adviser to the Indian prime minister said here Friday his country may reduce the weight of the dollar in the currency basket that helps set the weight of the rupee, which is only partially convertible.

Suresh Tendulkar said India is worried that the unwinding of global imbalances, which include record U.S. current account and foreign trade deficits and symmetric trade surpluses in China and Japan, will cause the dollar to depreciate.

"A currency realignment has to take place to correct global imbalances," Tendulkar said. "The Chinese yuan and the Japanese yen have to appreciate and the U.S. currency has to go down."

He said the shift from the dollar had to be planned carefully so it didn't cause market disruption.

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