Thursday, July 15, 2010

Dumping the dollar: Why it's time to diversify

Series of 1917 $1 United States Note

Image via Wikipedia

by Nin-Hai Tseng

Imagine a world without the almighty greenback as the main reserve currency.

It's not an easy thought. The U.S. dollar has long been the global currency of choice. As much as 64% of the world's currency reserves are held in greenbacks, according to the International Monetary Fund.

But given the manic ups and downs of the dollar in recent years, it may finally be time to diversify the world's reserves. And that's exactly what some central bankers around the globe are now doing.

This comes as a growing number of economists and policymakers are calling to move away from the greenback as the world's dominant currency. A recent United Nations report says the dollar's movements have been too erratic to hold value and the U.N. urges central banks to replace it with anything but a single currency or even multiple-national currencies.

One potential replacement is special drawing rights (SDRs), the international reserve created by the IMF in 1969. SDRs aren't something you can carry in your pocket like cash. They represent potential claims on currencies of IMF members. Because the value of SDRs is based on a basket of the world's major currencies (U.S. dollars, yen, euros and pounds), its value typically isn't as volatile as a single currency. Central bankers in Russia and China have supported the idea of SDRs.

"I think there is a general sense that these recommendations are at least worth debating," says José Antonio Ocampo, a Columbia University professor who served on a U.N. expert commission that considered ways of overhauling the global financial system. Ocampo says lessons learned following the financial crisis have renewed interest in the development of a global multi-currency system including SDRs.

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