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4th Dec 2021

EU rejects proposal for new reserve currency

  • The US dollar is the world's leading reserve currency. The Euro is the second such currency (Photo: www.freeimages.co.uk)

The EU's economy commissioner Joaquin Almunia rejected a Chinese proposal for a new reserve currency on Tuesday (24 March), saying he felt the dollar would remain the world's reserve currency for the foreseeable future.

Mr Almunia said he didn't envisage: "major structural changes in the role the dollar plays today as a major reserve currency," following Monday's call by China's central bank governor, Zhou Xiaochuan, to create a new reserve currency "that is disconnected from individual currencies."

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"Everybody agrees also that the [main] present world reserve currency, the dollar, is there and will continue to be there for a long period of time," said Mr Almunia after a meeting of commissioners in Strasbourg reports the Associated Press.

China's call for a new reserve currency reflects fears that its huge stockpile of dollar denominated US treasury notes, amounting to roughly half of its $2 trillion (€1.49trn) in foreign reserves, is in danger of being devalued.

Last week the US Federal Reserve announced the surprise decision to expand its balance sheet and buy up to $300 billion (€223bn) worth of longer-term US treasury securities.

Mr Zhou made the appeal for a reserve currency that "is able to remain stable in the long run" in an essay published on the People's Bank of China's website and included an English translation to ensure an international readership.

In the essay, Mr Zhou proposes that an accounting unit used by the International Monetary Fund known as special drawing rights (SDRs) and which is currently based on a basket of four currencies - the US dollar, the yen, sterling and the euro - should become the new reserve currency.

The proposal suggests expanding this basket of currencies to include all those from the world's major economies and a system whereby governments could store their reserve SDRs with the IMF. In time SDRs would replace the dollar as the world's reserve currency says Mr Zhou.

The British economist John Maynard Keynes, whose theory of counter cyclical spending to lift economies out of recession is currently in vogue, proposed a similar scheme in the 1940s.

The move highlights China's increased willingness to voice its economic opinions on the world stage and comes just ahead of a G20 meeting of the leaders of industrialised and developing nations on 2 April in London where reforming the IMF is firmly on the agenda.

Russia has also mooted the idea of a new reserve currency based on SDRs and has suggested the upcoming G20 meeting is the place to get the ball rolling.

On Tuesday Mr Almunia said that "everybody agrees" over the need to reform the IMF and give developing nations such as China a greater say in how it is run.

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