HSBC bids farewell to dollar supremacy

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6211858/HSBC-bids-farewell-to-dollar-supremacy.html

HSBC bids farewell to dollar supremacy
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 HSBC.
By Ambrose Evans-Pritchard
Published: 7:14PM BST 20 Sep 2009

Ambrose Evans Pritchard

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A dollar bill
All change: the dollar is losing ground as the world's reserve currency Photo: Bloomberg News

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

"The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP," he said

Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's "mercantilist mindset" of recent decades is about to be broken by the spectre of an inflation spiral.

The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.

The Fed's super-loose policy is turning the dollar into the key funding currency for the next phase of the global "carry trade", taking over the role of Japan during its period of emergency stimulus.

Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.

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http://www.businessweek.com/ap/financialnews/D9AST8RG1.htm

China suggests multinational sovereign fund

BEIJING

A deputy governor of China's central bank proposed the creation of a multinational sovereign wealth fund to help developing countries in a report released ahead of this week's Group of 20 summit.

"Considerations can be (given) to setting up a 'supra-sovereign wealth investment fund' to help channel capital inflow into developing world so that these countries can serve as new engines in global recovery," said the official, Hu Xiaolian, in a paper on the G-20's Web site.

The paper gave no details of how such a fund might work. But Beijing has called repeatedly for a more diverse global financial structure, with a greater voice for developing countries, and a new global currency to reduce reliance on the dominant U.S. dollar.

G-20 leaders, including Chinese President Hu Jintao and his American counterpart, Barack Obama, are meeting this week in Pittsburgh to discuss global economic recovery efforts and possible reforms to reduce future financial risks.

Hu Xiaolian's paper was delivered at a meeting of G-20 finance officials May 24-26 in Mumbai, India, according to the G-20 Web site.

It repeated China's complaints that the global crisis was caused by overreliance on the dollar and called for increasing the role of the International Monetary Fund's quasi-currency, Special Drawing Rights, which Beijing has proposed as a possible new global currency.

"The causes of the crisis are closely linked to the flawed international monetary system dominated by the U.S. dollar," it said.

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