NEW YORK (Reuters) – Treasury Secretary Timothy Geithner said on Wednesday the U.S. dollar will remain the world’s reserve currency for a long time, though he expressed openness to expanded use of an IMF currency basket.
The U.S. dollar tumbled after Geithner told policy-makers and business executives at the Council on Foreign Relations that he was “quite open” to a Chinese suggestion to move toward greater use of an IMF-created global currency basket comprising dollar, euros, sterling and yen.
Prompted by the moderator to clarify his position, Geithner said: “The dollar remains the world’s dominant reserve currency and I think that’s likely to continue for a long period of time.”
“As a country, we will do what’s necessary to make sure we’re sustaining confidence in our financial markets and in this economy’s long-term fundamentals,” he added.
Earlier this week, Chinese central bank governor Zhou Xiaochuan, said the world should consider using the IMF’s Special Drawing Rights (SDR) basket as a super-sovereign reserve currency.
Geithner said he hadn’t read Zhou’s proposal, but added, “as I understand it, it’s a proposal designed to increase the use of the IMF’s Special Drawing Rights. I am actually quite open to that suggestion.”
“But you should think of it as rather evolutionary, building on the current architecture, than rather than moving us to global monetary union.”
China’s foreign exchange reserves are the largest in the world at nearly $2 trillion and China is the biggest holder of U.S. Treasury debt.
The dollar initially fell against the euro on reports of Geithner’s remarks, but pared losses he reiterated his faith in the dollar as world reserve currency.
“Geithner admits to not having read China’s proposal, and President Obama’s comments on the dollar yesterday — no need for another reserve currency and that the dollar was fundamentally strong — was more of the underlying signal,” said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.
Senior Obama adviser Paul Volcker also said on Wednesday a Chinese suggestion to move toward a world currency system linked to the IMF’s SDRs was not practical.
“I understand restiveness about the lopsided nature of the present international monetary system that’s so dependent on the dollar,” Volcker said at a panel with British Prime Minister Gordon Brown at New York University.
But Volcker said when China questioned the dollar’s role as the world reserve currency, “They ignore the fact that they didn’t have to buy those dollars in the first place so they contributed to the problem.
FOREIGN APPETITE STRONG
Speaking on CNBC television later Wednesday, Geithner underscored his desire to see a strong dollar.
“I want to say this very clearly, a strong dollar is in America’s interest. We are going to make sure to pursue policies that improve the long-term fundamentals of the U.S. economy,” he said. Geithner also said there was “no evidence” foreign investors were losing interest in buy U.S. debt.
He also told CNBC there were signs the government’s efforts to support the economy and stabilize the financial sector were beginning to bear fruit, with the “pace of deterioration” slowing in some areas.
Geithner said in the interview that he was committed to putting the funds remaining in the Treasury $700 billion financial rescue program to work quickly and efficiently, and he held the door open to asking Congress for more.
“We always said this crisis may require more resources to deal with effectively, and we’re going to make sure we work with the Congress over time so that we can do this on a scale that is going to bring recovery back as soon as possible,” he said.
Geithner played down the idea that there was a sharp division between the United States and Europe over the amount of fiscal stimulus need to combat the global downturn.
“I think there is more commitment to a greater level of stimulus across the major economies than we’ve ever seen,” he said.