Bank Governor Zhou Xiaochuan’s proclamation that the US Dollar should be replaced as the primary reserve currency in favor of an international currency issued by the IMF echoes similar calls made by Russian leaders in recent weeks.
In advance of the upcoming G20 meetings, the esoteric daydream of a global benchmark currency has gained more political traction with the larger emerging nations –Nations that both resent the US Dollar hegemony and hold the bulk of their nation’s wealth in government controlled pools while their citizens live in relative deprivation. For these leaders the political attraction of knocking the US down a peg is intense.
This rhetoric is powerful and incendiary and, ultimately, meaningless. Even the most reactionary of these governments, if given the actual chance to replace the USD with an international basket, have only to look at the historical failure of international organizations to achieve long-term goals –whether the UN or IMF, or the squabbling between the strong and weak economies that comprise the EU to see the downside in holding reserves in a currency run by international committee.
When the rhetoric passes the US Dollar will remain the benchmark for the time being, and Chinese leaders will recognize that the best way to attack the Dollar’s dominance is to allow the Yuan to float freely and challenge the its leadership status – something that will be a political impossibility in the present environment.
Forward contracts for Yuan rose almost 1% overnight to the highest level in three months as a weaker US Dollar is increasingly priced in while spot rates increased 0.05% to 6.8296 USD. As the Chinese stimulus program picks up steam and the effects of reduced export taxes are felt by producers, the weakening Dollar will be paramount politically.