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Don't doubt the dollar

“The dollar remains the world’s dominant reserve currency,” Treasury Secretary Tim Geithner said during a speech in Manhattan to the Council on Foreign Relations March 25. “I think that’s likely to continue for a long period of time.”

These remarks boosted the currency’s ailing value and served as a clarification for Geithner’s earlier statements, the controversy that sent the global worth of the dollar plummeting.

Earlier in his speech, Geithner claimed that he was “quite open” to a suggestion in an essay submitted by the Chinese government to move towards a greater use of the International Money Fund’s Special Drawing Rights (SDR). SDRs are IMF-created global currency baskets comprised of dollars, Euros, pounds and yen that have been relied upon as a reserve asset since 1969.

The essay in question, authored by Zhou Xiaochuan, the governor of the People’s Bank of China, proposed a solution for the global economic crisis that involves adopting a more prominent usage of these SDRs. Currently, China possesses the largest financial reserves in the world—an estimated $2 trillion—and the nation is also the largest holder of U.S. debt.

Although Geithner’s initial comments seem to show that he was in agreement with Xiaochuan, he admitted to not actually reading the essay in its entirety.

These conflicting arguments have brought about much controversy, with many analysts expressing their discomfort with the situation. Paul Volcker, a senior Obama adviser, commented March 25 that the Chinese suggestion to move toward a world currency system linked to the IMF’s SDRs was not practical.

“I understand restiveness about the lopsided nature of the present international monetary system that’s so dependent on the dollar,” Volcker said at a panel with British Prime Minister Gordon Brown at New York University.

Volcker added that when China questioned the dollar’s role as the world reserve currency, “They ignore[d] the fact that they didn’t have to buy those dollars in the first place, so they contributed to the problem.”

In any case, Geithner claimed that the dollar’s role in the global financial system is evolutionary and dependent on how effective the U. S. is in getting its own recovery back on track, which also includes repairing the financial system and restoring the fiscal position to the point where it’s considered as being sustainable in the long run.

In order to attain these goals, Geithner proposed expanding the government’s ability to control and restructure ailing institutions, such as insurance companies, that threaten to destabilize the broader financial system.

“One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions besides banks,” Geithner said in his speech, “but our current regulatory system provides few ways to deal with these risks.”

If the measure is approved, it would represent one of the largest expansions of federal regulatory power by Congress in decades. However, numerous questions remain about how the authority would actually work, and experts caution that it would only be the first step in a broad overhaul of financial regulation that Obama and Congress are mapping out.

“The dollar is under suspicion due to a potential devaluation effect” from the flood of money the U.S. government is injecting into the economy to help unfreeze credit markets, said Brian Dolan, a currency strategist at Forex.com.

Dolan also claimed that Geithner’s plans appear to call the world currency reserves—now composed primarily of dollars, Euros and other major currencies—into more accurately reflecting the emergence of other major global players. This boils down to countries eventually holding stocks of Indian, Chinese and Russian currencies, for example.

Geithner said in an interview with CNBC that he was dedicated to putting the remaining funds in the Treasury’s $700 billion financial rescue program to work as soon as possible.

“We always said this crisis may require more resources to deal with effectively, and we’re going to make sure we work with Congress over time so that we can do this on a scale that is going to bring recovery back as soon as possible.”


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