How stable / shaky is the Dollar

Source: Brian Love,

http://www.guardian.co.uk/business/feedarticle/8593003

Dollar discomfort thrust onstage for Italy summit

* Summit expected to voice cautious
optimism on economy

* Crisis exit strategy remains a flashpoint, sources say

* China wants global reserve currency discussion

* Officials play down reserve currency debate

* Italy urges global conduct charter in business/finance

(Updates with China vice foreign minister He Yafei quotes)

By Brian Love

PARIS, July 5 (Reuters) - World leaders are
bound to express the hope that the worst of
the global economic crisis is passing when
they meet this week, but they are under pressure,
too, to manage a Chinese challenge to decades
of dollar supremacy.

Beijing, which has floated the idea of an alternative
to the dollar as world reserve currency one day,
wants a debate on the matter -- sensitive in
financial markets which are wary of
risks to U.S. asset values -- at
a July 8-10 summit in Italy, officials say.

With so much of its reserves invested in
U.S. assets, Beijing needs to ensure that its
longer-term goals do not spook markets in
the short term and hit the dollar's value
-- a point Vice Foreign Minister He Yafei
made in Rome on Sunday.

"The U.S. dollar is still the most important
and major reserve currency of the day,
and we believe that that situation
will continue for many years to come," He said.

Leaders from the Western economic powers
and Russia meet in Italy on Wednesday and
are joined the day after by leaders from China,
India, Brazil and others to discuss global challenges
-- chief among them the worst recession in living memory.

German Chancellor Angela Merkel says not
to expect any grand initiatives in Italy
on the economy, largely because governments
are already pumping trillions of dollars into
bank stabilisation and economic stimulus,
and also because they have their eyes on
a bigger G20 summit in the U.S. city
of Pittsburgh in September.

The best the Italians can expect from the meetings
in the quake-hit town of L'Aquila,
economists say, are statements that commit
the old and new economic powers
to keep working together to contain
the crisis and, once that is done,
envisage new rules for a better regulated global economy.

Carl Weinberg of High Frequency Economics
in New York says genuine coordination
beyond carefully negotiated communiques
is hard to have when governments are spending
so much money to tend to
their own voters and industries right now.

"In a time when fiscal budgets are stretched
and deficits are reaching historic proportions,
few governments will be able to find
the cash to support foreigners' standards
of living.

Resources are need to buy jobs at home," he said.

STORM PASSING?

Summit host Silvio Berlusconi, Italy's prime minister,
may find it easy enough to broker what the leaders
can say about the state of the economy right now,
namely that the situation may be stabilising
but the world is far from out of the woods.

The Organisation for Economic Co-operation
and Development raised its economic forecasts
on June 24 for the first time in two years,
predicting 4.1 percent GDP contraction in
the 30 mostly industrialised countries
of the OECD as a whole rather than
the 4.3 percent previously envisaged.

It forecast a minor 0.7 percent rise
in GDP next year instead of a further dip.

The tension may rise in L'Aquila though,
if, as sources say, Germany's Merkel
presses others to say in very explicit terms
that they are committed to reverse quickly
out of all the heavy spending and debts
they have run up once the recovery starts.

Budget deficits are forecast to rise six-fold
in the OECD group of countries by 2010,
from 2007 levels, to 8.8 percent of GDP
from 1.4 percent, the OECD's latest forecasts show.

Washington, London, Paris and Japan,
to name just some, do not want to commit
so hard and fast to such an "exit strategy",
even if they agree to the principle.

According to information gleaned from sources,
Germany will push the issue but
face stiff resistance to anything
beyond vague commitment.

Japanese officials cited the OECD's
latest commentary as a pointer to
the potential tenor of the statements
that would be issued by G8 leaders.

The OECD says fiscal stimulus should not
be withdrawn at a pace that jeopardises recovery.

The most delicate issue leaders will face
in economic terms is probably China's push
for consideration of alternatives to
the dollar as the world's reserve currency.

The dollar lost a cent versus the euro at
one stage last week when Reuters reported
sources as saying Beijing wanted the matter debated.

One official, speaking anonymously,
said China might push for mention of
the matter in published statements from Italy.

Other sources involved in preparation of
the meetings said Brazil and India backed
Beijing's call for debate but there was
consensus among the G8 countries,
at least, that nothing of significance could
or should materialise at this stage.

If China insisted on something being
put into a statement, it would surely be
with references worded obscurely
enough to be "meaningless",
one official who spoke to Reuters said.

"In the midst of what is still a significant
global recession, it's important that we
aim for stability, and stability has been
based on the U.S. dollar as
the global currency," Canada Finance Minister
Jim Flaherty said on Friday.

Beijing, equally, has reason to move carefully,
even if Zhou Xiaochuan, head of
the Chinese central bank, launched the debate
last March when he said the SDR,
the International Monetary Fund's unit
of account, might one day displace the dollar.

Some diplomats and bankers suggest
Zhou's primary aim was to highlight attention
on concern expressed by Premier Wen Jiabao
about the safety of China's huge dollar holdings
-- at risk if U.S. policy turns
to greater tolerance of inflation.

Bankers reckon China holds perhaps 70 percent
of its $1.95 trillion in official currency reserves in the dollar.

In his Rome briefing,
Chinese deputy foreign minister He said
it was "natural" to want to ensure the safety
of Chinese dollar investments but he appeared
keen to convey that the long-term debate
on reserve currencies was just that.

"You may have heard comments,
opinions from academic circles about
the idea of establishing a super sovereign currency.

This is all, I believe, now a discussion
among academics. It is not the position
of the Chinese government."

As for the outcome of the Italy meetings,
Marco Annunziata, economist at UniCredit bank,
said Beijing may want the issue discussed
with other leaders but would not push too hard.

"FX markets will of course wonder till
the last minute whether the BRICs or China
alone will mount a serious challenge
to the dollar, but are bound
to be disappointed," he said.

In L'Aquila, Italy is also pressing leaders
to back a global charter for business and finance,
a sprawling compendium of best practices
in labour, taxation, investment and
myriad other domains where
international organisations have produced
thousands of mostly voluntary
guidelines over the decades.

Germany's Merkel wants something of
the same sort but it is far from clear,
officials say, that the gathering will reach
anything amounting to a definitive decision
on the charter the Italians calls
the Lecce Framework.

(With reporting by Reuters reporters worldwide)

Source: Brian Love,

http://www.guardian.co.uk/business/feedarticle/8593003

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