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Can A New World Currency Displace The Dollar?

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  1. The background
  2. Why is China reacting this way?
  3. Could this be changed?
  4. Conclusion

In the article ?China suggest an end to the dollar era2?, The Economist outline the fact that, ?in the future, changes to the international system are likely to be shaped by Beijing as well as Washington?. To replace the current system, Mr Zhou Xiaochuan, the governor of the People's Bank of China, suggests expanding the role of special drawing rights which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once it collapsed in the 1970s. Today, the value of SDRs is based on a basket of four currencies ? the US dollar, yen, euro and sterling ? and they are used largely as a unit of account by the IMF and some other international organizations.
China's proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions. Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies. As a matter of fact, experts noted that such a system was "relatively volatile, deflationary, unstable and (had) inequity associated with it.

[...] A new calculation of voting rights should be done, and the enlargement of the currency basket to Yuan, Rouble and Gold. It means USA would accept the idea of a common currency. It seems that we are far from this option. Senior Obama adviser Paul Volcker said that the Chinese suggestion to move toward a world currency system linked to the International Monetary Fund's Special Drawing Rights was not practical. understand restiveness about the lopsided nature of the present international monetary system that's so dependent on the dollar," But Volcker said when China questioned the dollar's role as the world reserve currency, "They ignore the fact that they didn't have to buy those dollars in the first place, so they contributed to the problem."Volcker said he thought the issue of the role of the dollar "should receive more attention in the next year or two than it has in the last decade or so. [...]

[...] By openly contesting the dollar hegemony, and pleading for a common world currency system linked to the International Monetary Fund's Strategic Drawing Rights China has several objectives: First of all, avoid the criticism on the Yuan. M. Geithner 4 already accused Beijing to manipulate his own currency. It is well know that the yen is under evaluated and has stopped its ascension towards the re- evaluation against dollar between July 2005 and Nov. 2008). Second, the Chinese government fears a dollar devalorization that would devalorize its huge reserve. [...]

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