By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, March 26, 2009
NEW YORK, March 25 -- Treasury Secretary Timothy F. Geithner said Wednesday that the United States would do whatever it takes to make sure the dollar would remain the world's dominant reserve currency, clarifying comments he had made earlier in the day that had caused the greenback to fall against major currencies.
"I think the dollar remains the world's dominant reserve currency," Geithner said during a question-and-answer session at the Council on Foreign Relations here. "I think that's likely to continue for a long period of time. And as a country, we will do what's necessary to make sure we're sustaining confidence in our financial markets, and in the productive capacity of this economy and in our long-term fundamentals."
Earlier in the session, Geithner was asked for his thoughts on a recent paper by Zhou Xiaochuan, the governor of the People's Bank of China. The paper called for an eventual alternative to the dollar as the world's reserve currency, proposing an expansion of "special drawing rights," a basket of currencies created by the International Monetary Fund decades ago.
Calling Zhou a "very thoughtful" and "distinguished" central banker, Geithner, who said he had not read the paper, responded: "As I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion."
He went on to say that there would be no "global monetary union" and endorsed the dollar's ongoing role as the dominant reserve currency. But headlines were already flashing across traders' desks, and a jittery market sold off the dollar, causing the currency to weaken by more than 1 percent against the euro.
Prodded by the event's moderator, Roger Altman, a former Treasury official who is now head of the boutique investment bank Evercore Partners, Geithner followed up with his strong outlook for the dollar and the sell-off reversed course with the currency regaining about half of its losses.
The activity underscores market sensitivity around the dollar at a time when the United States is borrowing large amounts of money to try to ignite an economic recovery. The dollar had fallen after the announcement by the Federal Reserve last week that it would, in essence, print more dollars to buy Treasurys and other securities. Russia recently made a call similar to China's for an alternative to the dollar.
"The environment that we're in, what someone says, unless it's overtly positive about the dollar, is interpreted as a negative," said Brian Dolan, chief currency strategist at Forex.com. Geithner's comments "came at a particularly delicate time. He basically seemed to endorse the idea put out by Zhou."
Speaking in Paris, IMF Managing Director Dominique Strauss-Kahn, said the discussions about a new currency, which are not new, were "absolutely legitimate." But he also said "there's no reason to believe it will move rapidly."
Also yesterday, other U.S. officials defended the dollar's role in the global economy and said the Chinese proposal was not practical. China holds an estimated $1 trillion in U.S. government debt.
Paul Volcker, a top economic advisor to President Obama, defended the dollar's role in the global economy at a panel at New York University. When Chinese officials question the dollar's role as the world's reserve currency, Volcker said in remarks reported by Reuters, they are ignoring the fact that "they didn't have to buy those dollars in the first place, so they contributed to the problem."
Nevertheless, Volcker said he understood the "restiveness about the lopsided nature of the present international monetary system that's so dependent on the dollar."
The sentiment was echoed by San Francisco Federal Reserve Bank President Janet Yellen, who said China's concern about the dollar is "understandable" given its lack of diversification, according to Reuters. She said the Chinese proposal was interesting but "far from being a practical alternative."