We've heard a lot of saber rattling recently about the need for an alternative to the dollar from Russia and China, but that talk was put to rest when Russian Finance Minister Alexei Kudrin told the world that the dollar was in "good shape" and there's no need for a substitute for the world's reserve currency.
Some thought Russia was singing a different song when President Dmitry Medvedev questioned the dollar's global status and joined China's central bank Governor Zhou Xiaochuan in a call for another benchmark for settling international debts. But Brazil, China, Russia and India depend on the U.S. and its $2.5 trillion export market too much to make waves. Even though some leaders of these countries may question the dollar's status publicly, they continue to increase their reserves in dollars to limit the gains in their own currencies and support their exports. These four nations now have combined reserves in dollars totaling $2.8 trillion and are among the largest holders of U.S. treasuries.
The dollar accounted for 64 percent of central bank reserves at the end of 2008, up from 62.8 percent in June 2008, according to the International Monetary Fund (IMF). The U.S. dollar has underpinned exchange rates since the 1971 collapse of the Bretton Woods system in 1971, which linked the value of the dollar to gold.
China and Brazil last month indicated that they may look at ways to drop the dollar for trade between their two countries. One suggestion is to use the IMF unit of account as an alternative. But in reality no good alternative has been found for the dollar so no one is making any quick moves to rid themselves of dollars.
Japanese Finance Minister Kaoru Yosano says his country's confidence in U.S. treasures in "unshakable" and clearly indicated Japan plans to continue buying them. His comments sent the dollar higher against the euro and the yen. "They want to protect the value of the assets they already have in terms of treasuries," Nick Bennenbroek, head currency strategist at Wells Fargo told Bloomberg. "If there's going to be a move away from the dollar, it's going to be very gradual, very cautious.
China holds $767.9 billion of U.S. debt as of March and remains the largest U.S. creditor, according to Treasury department officials. Japan is second with $686.7 billion. Brazil holds $126.6 billion and Russia holds $138.4 billion.
China continues to purchase dollars because it wants to suppress the value of its own currency. If Chinese currency raises against the dollar, it cuts into its export business. China's exports to the U.S. rose to $337.7 billion in 2008 from $321.4 billion in 2007.
Lita Epstein has written 25 books, including The Complete Idiot's Guide to Foreign Currency Trading.
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