BRICbats appear

China, Russia, Brazil, and other emerging market nations have suggested that an alternative reserve currency be established to protect developed and developing nation economies with large dollar-denominated holdings against a further depreciation in the dollar. These nations are concerned that the U.S.'s large budget deficit -- forecast to hit a record $1.8 trillion this year before declining to a still-problematic $1 trillion next year -- will result in additional dollar declines versus the euro, British pound, Swissfranc, and yen.

Still, although the 'anything-but-the-dollar' sentiment appeared to gain steam earlier this spring at an emerging market nation meeting, the momentum stalled this week after Russian President Dmitry Medvedev signaled that talk of a wholesale move to a new primary medium of exchange for international transactions was not practical at this time.

"The dollar system or the system based on the dollar and euro have shown that they are flawed. But I am a realist and I understand that today there is no alternative to the dollar or the European currency," Medvedev said, Reuters reported.

Saudis see only one reserve currency

Economist Andrew Hill told DailyFinance Thursday that along with progress on the financial crisis and the global recession, member countries attending the G-8 summit also would have allocated considerable meeting time to discuss an alternate reserve currency, but the subject was tabled after word spread that Saudi Arabia said it would oppose any effort by OPEC to price oil in any currency other than the dollar.

The dollar was little-changed Thursday against the world's other major currencies on Gibbs' comments, down about one cent versus the euro and British pound, to $1.3961 and $1.6201, respectively. The dollar has rallied this week after risk aversion gripped institutional investors on renewed concern that the U.S. and global economic recoveries will not start by Q3/Q4.

"Once word spread that the Saudis did not view a move away from the dollar as constructive at this time, the new global reserve currency talk died down," Hill said. "To move away from the dollar, you need to change the pricing mechanism for most commodities as well, to the euro or Swissfranc, or whatever, and that's a non-starter if oil remains priced in dollars."

The Saudi message "also signaled that the Saudis are not entirely convinced that the euro will remain strong, and that European leaders will be as successful at containing inflation as the U.S. has over the decades," Hill added. Although the U.S.'s social spending may increase in the decade ahead, euro-zone countries have more-extensive social safety nets, which at least historically, has led to higher rates of inflation, Hill said.

China also has softened its criticism of the dollar this week. Calling recent comments to talk-down the dollar "deeply problematic, and ultimately self-defeating," economist David H. Wang, a China expert, said China now realizes that the reserve currency issue is complex and loose talk on "shifting to a new global reserve currency," is not constructive, for the U.S. or other major economies.

"Beijing's stance was another example of 'hard Economics 101 lessons learned,'" Wang said. "Frankly, it was a ridiculous stance, which they've since realized and are now backing away from. I mean, why would you talk-down the dollar when you hold more than $1.2 trillion in dollar-denominated assets and reserves? You're decreasing the value of your own assets, Beijing soon realized this, so you'll see very few specific criticisms of the dollar in the future."

Monetary Analysis: White House Spokesman Gibbs' comments aside, talk of a move away from the dollar as the global reserve currency hints that nations could move out of dollar-denominated assets if the dollar weakens further. That means the relatively low interest rates the U.S. currently benefits from to finance its deficit and debt, as a result of a preference for dollar assets, could end. Translation: The U.S. must get its fiscal and economic house in order to strengthen the dollar. The tasks at hand: 1) cut the federal budget deficit via spending cuts and tax increases; 2)continue efforts to jump-start the U.S. economy; 3) cut the trade deficit via a sustained economic growth strategy based on investment and exports, and via decreased consumption of imports; and 4)control inflation via the removal of quantitative easing monetary stimulus, when prudent to do so.

The above are not easy tasks for U.S. policy makers or citizens, but completing them will not only ensure a strong dollar, they'll also lead to a vibrant, dynamic, self-reliant U.S. economy.