No plausible alternatives to US dollar - Princeton University economist

There's no credible alternative to the US dollar as the world's dominant currency, a meeting of top economists will hear next week. Princeton University Professor Peter B. Kenen argues that neither Europe's nor China's currency presents a valid substitute nor an International Monetary Fund alternative to the US dollar that was created some 40 years ago.

"There is, I submit, no plausible candidate," Professor Kenen says in a paper that will be discussed on January 7 at the annual meeting of the American Economic Association.

The US was criticised by several countries after the Federal Reserve announced in November it would buy more government bonds to lift the economy.

Countries with export-led economies, including Germany and China, accused the Fed of deliberately trying to weaken the US dollar.

The US dollar's widespread use in world trade gives the US currency a powerful role in the global economy, making countries around the world more sensitive to US economic policy.

The euro, shared by 16 countries in Europe, is the second most important international currency. But the paper notes it has shown no signs of raising its role in the international monetary system. The debt crisis that has plagued the region for more than a year isn't helping.

The euro's share of global foreign-exchange reserves stood at $US1.246 trillion ($1.23 trillion) in 2009, or 27.3 per cent of total official reserves, according to the IMF.

That's broadly unchanged from the euro's introduction a decade earlier. The US dollar's share was 62.2 per cent last year, or $US2.837 trillion.

Even the Bank for International Settlements' 2010 survey of foreign-exchange trading shows the US dollar's continued dominant role. The US currency was involved in about 42 per cent of all foreign-exchange transactions, compared with 20 per cent for the euro, the next most widely traded currency.

In 1969, amid international tension between the US dollar's peg to gold and a large US budget deficit, an alternative to the greenback was created.

But the IMF's Special Drawing Rights have never played a major role outside official transactions overseen by the institution even after China last year revived the idea of using SDRs as a viable reserve currency.

The Asian country holds some $US2.5 trillion of foreign currency reserves, most of which is in dollars, and therefore stands to suffer big losses if the dollar were to weaken sharply against other currencies.

Given the huge and rapidly growing size of the Chinese economy and the country's big role in world trade, the yuan could also be a plausible candidate for reserve-currency status. China's public debt is estimated at $US4.9 trillion in 2009, compared with some $US8 trillion for the US.

The Princeton paper notes, however, that the supply of readily tradable securities of the sort typically held as reserve assets appears to be smaller and market access to them is more limited.

What's more, China has shown few signs of wanting a leadership role in the world economy like the US, refusing to bow to pressure from other countries to abandon its policy of boosting economic growth by keeping the value of its currency artificially low.

Indicating they aren't ready to take that role, politicians in China have argued the country is still lagging behind others in technology and that most of its huge population live in poverty.

-Wall Street Journal