27th Jan 2022

ECB chief backs dollar amid calls for reserve currency debate

  • Sources say the debate on the dollar's role in the global currency basket might still be avoided due to market concerns (Photo: EUobserver)

European Central Bank president Jean-Claude Trichet has praised the US' commitment to the strong dollar as several world powers including France and Russia call for a fresh debate on the global currency system ahead of this week's G8 summit of leaders in Italy.

Asked by journalists on Sunday (5 July) whether the US dollar should remain the world's key currency, Mr Trichet said: "On this issue, I am very very clear. I have just one message. It is extremely important that the US has been saying that a strong dollar is in the interests of the US."

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"I consider that extremely important and I welcome this declaration," he added on the sidelines of an economic conference in Aix en Provence, southern France, according to Forbes.

At the same forum, French finance minister Christine Lagarde called for better foreign-exchange policy coordination, adding that the world leaders should discuss how $6.5 trillion in currency reserves are managed.

She argued that questions need to be asked about "the balance of currencies and the role of currencies in a world that has changed because of the crisis and the growing role of emerging countries," Bloomberg reported.

Bank of France Governor Christian Noyer expressed a similar message in the conference: "We really need to make sure there is a greater stability between the big currencies in the period to come."

Meanwhile, Russian President Dmitry Medvedev reiterated his support for a new international reserve currency, stating "The dollar system or the system based on the dollar and euro have shown that they are flawed," in an interview with Italian daily Corriere della Sera.

However, the Russian leader admitted that new reserve currencies "can't be introduced by presidential decree or by order of the central bank. It's about trusting countries' economies." There is currently no alternative to the dollar or the euro, Mr Medvedev added.

The discussion about the global currency basket comes as the leaders of seven most industrialised countries plus Russia are due to gather in the Italian city of L'Aquila on Wednesday (8 July) and then meet their counterparts from the main developing countries.

China has been lobbying for a debate on the stability of dollar as the main reserve currency while high-level representatives from India have hinted that the country is internally discussing a possible shift from the dollar in its foreign holdings.

The challenge to the US currency – which has underpinned the international monetary and trade system since the end of the WWII – comes as a consequence of the global financial and economic crisis sparked by the US.

But there are signals that the currency debate might still be muted due to concerns over its possible negative impact on the financial markets.

"There is pretty broad consensus with the G8 that this is not the time to experiment with reserve currencies, however attractive it might seem," Reuters quoted a source following the summit.

The G7 club includes the US, Canada, Japan, Germany, France, Britain and Italy but the Italian prime minister Silvio Berlusconi said he would also invite Spain and the Netherlands to join this week's session.

The economic downturn in its complexity features high on the meeting's agenda, as last week's job figures somewhat dashed hopes for an early recovery from the worst crisis since 1930s.

The G8 nations might also move on with the climate change issues, with the BBC reporting that they are setting a target to cut greenhouse gases by 80% by 2050, in L'Aquila.

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