Below The Beltway

Once again, the fate of the dollars as the world’s reserve currency is a subject of debate:

PITTSBURGH, Pennsylvania (AFP) – The embattled US dollar is expected to come under scrutiny at a summit of developing and industrialized nations following China-led calls to review its role as a reserve currency.

The dollar issue is bound to surface at the two-day meeting in Pittsburgh as US President Barack Obama and other leaders of the Group of 20 economies debate a new framework for tackling the so called global “economic imbalances” blamed for fuelling the latest financial crisis.

“Though not clear how the plan would be enforced, it would involve measures such as the US cutting its deficits and saving more, China reducing its reliance on exports and Europe making structural changes to boost business investment,” analysts at French bank Societe Generale said in a report.

Some argue that the financial crisis resulted from imbalances between savings and investment in major economies, which have led to large current deficits, as evident in the United States, and surpluses, as enjoyed by China.

Beijing was the first to call for a new global currency as an alternative to the US dollar as the US deficit rocketed — the White House estimates it could reach nine trillion dollars over a decade.

Chinese Premier Wen Jiabao expressed concern as early as March over the safety of his country’s huge US bond holdings now worth more than 800 billion dollars, making it the largest creditor to the United States.

Then, Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world’s largest, raised the stakes by calling for a new reserve currency in place of the dollar.

He wanted the new reserve unit to be based on the SDR, a “special drawing right” created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.

“These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own,” said Richard Cooper, a professor of international economics at Harvard University.

In addition to this, a new report from HSBC is already seeing the end of the Dollar Era:

The sun is setting on the US dollar as the ultra-loose monetary policy of the US Federal Reserve forces China and the vibrant economies of the emerging world to forge a new global currency order, according to a new report by HSB

“The dollar looks awfully like sterling after the First World War,” said David Bloom, the bank’s currency chief.

None of this should be surprising, really.

We’ve run up record deficits and have projects showing the federal debt growing exponentially over the next decade. That is going to have an impact on the value of the dollar, and the state of the economy. It’s only natural that the rest of the world would be reticent to continue putting trust in a dollar that may start losing value very quickly.