China Holds Sway Over US Dollar

China continues to talk negatively about the role of the US dollar as the world's reserve currency. They announced today that they will settle all trade with Yuan instead of dollars. Russia, Brazil and India are also starting to trade using non-dollar local currencies. The demise of the dollar is gaining steam and the Fed's quatatative easing (money printing) and the Obama Administration's $1.5 trillion dollar budget deficits assure it.-Lou

Beijing Formalizes Call for New Reserve Currency

BEIJING -- China's central bank reiterated its call for the creation of a new international currency that could replace currencies such as the dollar in countries' official reserves.
In its annual report on financial stability, issued Friday, the People's Bank of China said the country will push reform of the international currency system to make it more diversified and reasonable. While it didn't specifically target the U.S. currency, it said it aims to reduce over-reliance on the current reserve currencies, of which the dollar is the biggest.

"To avoid the shortcomings of sovereign credit currencies acting as reserve currencies, we need to create an... international reserve currency that can maintain the long-term stability of its value," the PBOC said.

The report, a lengthy document that addressed a broad range of issues, reiterated a proposal made by PBOC governor Zhou Xiaochuan in March to use Special Drawing Rights, the synthetic currency developed by the IMF, as a super-sovereign reserve currency. That proposal, made just before the G20 summit in London earlier this year, appeared in an essay authored by Mr. Zhou and posted on the PBOC's Web site.

The call for a new global reserve currency was among a host of factors exerting pressure on the dollar Friday. The U.S. currency fell during New York trading against the U.K. pound, Australian dollar, yen, Swiss franc and euro.

The PBOC comments "fuel concern about reserve diversification undermining the U.S. currency," said analysts at Credit Suisse.

Senior Chinese officials, including Premier Wen Jiabao, have repeatedly expressed concern about the dollar, which comprises most of China's roughly $2 trillion in foreign-exchange reserves. China is concerned that the dollar's dominance exacerbates global financial imbalances. It also worries that massive U.S. government borrowing to support stimulus spending could eventually lead to inflation, hurting the value of China's holdings.

The SDR proposal's inclusion in the central bank's latest stability report appears to formalize the idea as an official view of the central bank, which ultimately reports to China's State Council.
China's central bank said in the annual report that under the proposal, the IMF should "manage part of the reserves of its members" and be reformed to increase the rights of emerging markets and developing countries.

It also urged stronger monitoring of countries that issue reserve currencies. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency.

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