Call for Alternative to the Dollar Intensifies

Pressure on the dollar as the world reserve currency is steadily increasing. An actual replacement appears presently unavailable, even though in recent months, Russia and China have stated more than once that they would like to see an alternative to the “greenback.” In the meantime, countries like India and France have become involved in the debate. These countries want the issue included in the agenda of the forthcoming G98 meeting.

On Monday, the dollar traded lightly against the euro. The euro was quoted at $1.3905. At the close of the European market on Friday, the euro was worth $1.4005.

Incorporated in the exchange rate

“The pronouncements about the dollar are meanwhile processed in the price of the exchange rate,” writes currency strategist, David Wood, of Barclays in London. He expects that in the short run, the dollar will rise to just about $1.35 against the euro. Wood attributes this to the correction in commodity and equity markets. “You notice that as these markets fall, the American currency then becomes stronger.”

In the long term, six to 12 months, the currency strategy will be more negative. Woo anticipates that the dollar can fall to a range between $1.45 and $1.55.

System shows flaws

In recent days, there have been calls, again, for an alternative to the dollar. “The world reserve system, based on the dollar and the euro, has shown that it is flawed.” according to Russian President Dmitry Medvedev, in an interview with the Italian newspaper, Corriere della Sera. He reiterated his position to introduce a new international reserve currency. It is expected that United States President Barack Obama, who arrived yesterday in Moscow, will discuss this issue with Premier Vladimir Putin.

Suresh Tendulkar, economic adviser to Indian Premier Manmohan Singh, revealed last week that he is urging his county toward greater diversification in its currency portfolio. Tendulkar proposes that the Central Bank of India buy fewer dollars.

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Also, French Minister of finance, Christine Lagarde, said Sunday during a conference, “that a better coordination of exchange rates needs to be examined.” According to her, questions need to be raised about “the balance of exchange rates and the role of currencies in a world that has changed because of the credit crisis and the growing role played by emerging markets,”

Euro, pound or the yen?

But what is the alternative? The most logical candidates are the euro, the pound sterling and the yen. They are currencies of countries with sufficiently strong financial markets and with a robust legal system that guarantees property rights.

Moreover, they are countries with relatively little intervention in the foreign exchange market, according to a report by Barclays. It is exactly on these prerequisites that the currencies of emerging countries score poorly. Most important, it seems unlikely that they will soon get their affairs in order. Before the yuan, the rupee or the ruble become serious challengers to the dollar, a lot of water will flow though the Rhine.