The dollar’s status as the world economy’s sole reserve currency may deteriorate, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.
“We may see complementary reserve currencies,” Roubini said at a conference today in Athens. While it’s “not going to happen overnight,” the development “will diminish the role of the dollar over time.”
The dollar’s status has come into question as leaders of Brazil, Russia, India and China discuss substituting other assets for their dollar holdings amid a ballooning budget deficit that keeps the U.S. dependent on foreign financing. China alone owns about $744 billion of U.S. Treasury bonds among its $2 trillion of foreign-exchange reserves.
Russian President Dmitry Medvedev last week renewed his call for consideration of a supranational currency to challenge the dollar. Chinese Central Bank Governor Zhou Xiaochuan said in March that the International Monetary Fund should create a “super-sovereign reserve currency.”
For the U.S., a change in the role of the dollar would risk increasing its financing costs and undermining its preeminent place in the world economy. The yield on the 10-year Treasury bond jumped to 3.9 percent this week from a low of 2.2 percent in January.
The dollar today weakened against the euro, falling 0.3 percent to $1.4019 per euro as of 10:37 a.m. in London. The currency has dropped 10 percent against the euro in the past three years.
Treasury Secretary Timothy Geithner sought to reassure investors last week during a trip to China, saying June 2 that Chinese officials expressed “justifiable confidence in the strength and resilience and dynamism of the American economy.” Demand for record sales of U.S. debt will be sufficient to meet supply, he said.
The U.S. and China will hold economic talks in Washington in the week starting July 27. Premier Wen Jiabao in March called for the U.S. “to guarantee the safety of China’s assets.”
Roubini, 51, also said today that the U.S. can’t count on a strong economic recovery to restore its finances. The world economy will remain weak for the next two years, he said, predicting growth of 1 percent in the U.S. in 2010 and stagnation in Japan and Europe.
“Recovery will be weak, anemic, subpar,” he said. Optimists are “getting ahead of the curve” and “advanced economies are going to grow at a very slow rate” after the recession is over, he added.
Larger emerging economies such as Russia and Brazil are also seeking more clout in the international financial system by pouring their reserves into IMF bonds, economists say.
Russia and Brazil have announced plans to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said.
Even so, those countries may struggle to elbow aside the dollar as long as they keep buying U.S. paper to hold down their own exchange rates and maintain trade surpluses.
The so-called BRICs countries increased foreign exchange reserves by $60 billion in May and accumulated dollars at the fastest pace since before the credit markets froze last September.
Gekko: Its time to used gold dinar.