2009-10-20
US dollar likely to remain reserve currency-paper
SANTA BARBARA, Calif., Oct 20 (Reuters) - The U.S. dollar is likely to remain the world's reserve currency for decades, a prominent economist told a conference of international monetary policy makers hosted by the San Francisco Federal Reserve on Tuesday. "I don't think the dollar is going anywhere, and I don't think the SDR (International Monetary Fund-issued special drawing rights) will become an important rival to the dollar until we have liquid private markets in SDR-denominated claims," said Barry Eichengreen, a professor of economics and political science at the University of California at Berkeley.
The dollar has slid in value relative to other currencies in recent months as investors have questioned the sustainability of the large U.S. budget deficit. Some countries, including China, a large holder of dollar-denominated assets, have suggested that there may be room for other options besides the dollar as the global reserve currency.
"The future of the global reserve system looks a lot like the past of the global reserve system," Eichengreen said.
An alternative approach to an IMF SDR currency would be to diversify reserves among the United States, the euro area, and China, Eichengreen said. That is a more likely outcome but would also be at least 20 years in the making, he said.
"The euro and the renminbi will match the dollar as an attractive form of reserves only when they possess equally deep and liquid markets," he said.
The crisis of 2007-2008 should teach monetary policy makers to worry about trade and capital flow imbalances and embolden them to raise interest rates even when inflation is not a worry, Eichengreen said.
Fiscal policy makers should not allow the current account gap to widen during periods of solid national economic growth, he said.
That is one lesson from the period between 2003 and 2006, when U.S. public sector borrowing and budget deficits rose during a period of growth, Eichengreen said.
"Fiscal policy makers would have done better to keep their powder dry," he said.
