Russian Finance Minister Alexei Kudrin said the dollar is in “good shape,” further affirming that there’s no substitute for the world’s reserve currency.
Kudrin rushed to reassure investors of Russia’s confidence in the dollar just days after his boss, President Dmitry Medvedev, questioned its global status, joining China’s central bank Governor Zhou Xiaochuan in suggesting the world may need another benchmark for settling international debts.
“It’s too early to speak of an alternative,” Kudrin said in an interview two days ago in Lecce, Italy, after meeting officials from the Group of Eight nations.
Kudrin’s comments underscore the dependence of Brazil, China, Russia, and India on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market. Even as some of their leaders questioned the dollar’s status, the four nations increased foreign reserves by more than $60 billion in May to limit their currencies’ gains and support their exports. They now have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.
“At this point there’s no alternative to the U.S. dollar in terms of deep liquid markets and trading 24-7 globally,” Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, said yesterday in a telephone interview. “Nothing even comes close to the dollar in terms of reserve status.”
Stronger Dollar
The dollar rose today against all 16 of the most traded currencies expect for the yen, climbing 1.2 percent against the euro to trade at $1.3854 at 2:27 p.m. in London. Treasuries climbed for a third day and the yield on the U.S. 10-year note fell seven basis points to 3.72 percent.
At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the International Monetary Fund in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.
The Dollar Index, which tracks the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, has dropped 10.6 percent to 80.142 from its high this year of 89.624 on March 4, when the global financial crisis sent investors to the relative safety of U.S. debt.
Summit
Leaders of the so-called BRICs nations -- Brazil, Russia, India and China -- may use their first summit this week to press the case that their 15 percent share of the world economy and 42 percent of global currency reserves should give them more influence over global financial policies.
Among the topics in the Ural Mountains city of Yekaterinburg will be the global financial crisis, reshaping the IMF, climate change and the future of dialogue among the BRIC countries, He Yafei, a vice minister at China’s Ministry of Foreign Affairs, said last week. The leaders probably won’t discuss alternative reserve currencies, Medvedev aide Sergei Prikhodko told reporters in Moscow yesterday.
Developing countries say their votes in the IMF, founded at the end of World War II to promote global trade, don’t reflect the shift in economic power. Brazil, the world’s 10th-largest economy, has 1.38 percent of the IMF board’s votes, less than the 2.09 percent for Belgium, an economy one-third the size.
Record Debt
The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.
Emerging-market currencies gained as international investors fled the dollar on concern record debt sales by the U.S. government to finance a mounting budget deficit will sap demand for American financial assets.
International holdings of long-term U.S. equities, notes and bonds rose at a slower pace in April, the Treasury said today, with total net purchases climbing a net $11.2 billion. That’s down from $55.4 billion in March.
Ten-year Treasury note yields reached 4 percent on June 11, the highest since October, a day after Russia and Brazil announced plans to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, according to Brazilian Finance Minister Guido Mantega.
Mix of Currencies
China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries. Medvedev on June 5 proposed that nations use a mix of regional reserve currencies to reduce reliance on the dollar, which he said “is not in a spectacular position.”
China’s central bank Governor Zhou suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March.
The dollar got some support last week when Japanese Finance Minister Kaoru Yosano said his country’s confidence in U.S. Treasury securities is “unshakeable,” signaling the second- biggest foreign holder of the securities will keep buying them.
“We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending the G-8 meeting of finance ministers in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”
Maintaining Dollar’s Value
Yosano’s comments, which sent the dollar higher against the euro and yen, show how Japan and other holders of dollar reserves have an interest in maintaining the value of the currency and avoiding any abrupt move toward an alternative, said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.
“They want to protect the value of the assets they already have in terms of Treasuries,” Bennenbroek said. “If there’s going to be a move away from the dollar, it’s going to be very gradual, very cautious.”
China is the largest U.S. creditor, holding $767.9 billion of U.S. debt as of March, according to Treasury Department figures. Japan is second with $686.7 billion. Brazil holds $126.6 billion, while Russia has $138.4 billion.
Nations such as China are also dependent on the U.S. as a market for their exports, so they seek to suppress the value of their currencies with purchases of dollars. China’s exports to the U.S. last year rose to $337.7 billion from $321.4 billion in 2007.
“They can’t have their cake and eat it, too” said Woolfolk at Bank of New York Mellon. “These countries want to perpetuate this system of accumulating foreign currencies to hold down the value of their own, but they want someone else to bear the risk of holding those dollars.”
