Will a new global reserve currency replace the US Dollar in 2009?

Wow, great question! See also

http://www.huffingtonpost.com/2009/03/24/china-super-currency-need_n_178592.html

http://www.reuters.com/article/companyNewsAndPR/idUSN2461991920090324

I think maybe the initial odds were way too high, as there's no way this will happen; inertia for the status quo is just too great, and resistance to change is just to high. Even if everyone agreed it should happen--and good luck making that happen--it would take a few years at a minimum to set everything up, so 2009 is far too soon.

@sqlman -- with a little economic prose I suppose we should never underestimate the rate at which change can accelerate! :-)

The background is kind of vague about how exactly this will settle, but I took it to imply that the IMF's creation of a new "reserve currency" would suffice to settle as a "yes" regardless of whether the dollar actually loses its primacy as such. I will admit that making that currency have global value might not be easy, but if any country can do it, China might be able to. Maybe. Does that maybe help explain the initial likelihood? And is that what you intended, lola?

As the background lacks specificity, I take the question at face value: the U.S. dollar must be replaced by another currency, namely the IMF's SDR. Is that right, lola?

This question is looking for the emergence of "a supranational or transnational global currency" (of which the IMF's SDRs would be one) to replace the US dollar in 2009 as the global reserve currency for this market to settle as YES.

Thank you for the pointing out the need for additional clarification capecodviking and sqlman.

Geithner 'Open' to China Proposal
March 25, 2009 | Politico

Geithner, at the Council on Foreign Relations, said the U.S. is "open" to a headline-grabbing proposal by the governor of the China's central bank, which was widely reported as being a call for a new global currency to replace the dollar, but which Geithner described as more modest and "evolutionary. I haven’t read the governor’s proposal. He’s a very thoughtful, very careful distinguished central banker. I generally find him sensible on every issue," Geithner said, saying that however his interpretation of the proposal was to increase the use of International Monetary Fund's special drawing rights -- shares in the body held by its members -- not creating a new currency in the literal sense.

"We’re actually quite open to that suggestion - you should see it as rather evolutionary rather building on the current architecture rather than moving us to global monetary union," he said. "The only thing concrete I saw was expanding the use of the [special drawing rights]," Geithner said. "Anything he’s thinking about deserves some consideration." The continued use of the dollar as a reserve currency, he added, "depends..on how effective we are in the United States...at getting our fiscal system back to the point where people judge it as sustainable over time." President Obama flatly rejected the notion of a new global currency at last night's press conference.

UPDATE: Evidently sensing a gaffe, moderator Roger Altman told Geithner that it would be "useful" to return to the question, and asked if he foresaw a change in the dollar's centrality. "I do not," Geithner said, adding several forceful promises, including, "We will do what's necessary to say we're sustaining confidence in our financial markets."

http://www.politico.com/blogs/bensmith/0309/Geithner_open_to_China_proposal.html

Geithner's 'Foot-in-Mouth' Disease
March 25, 2009 | Wall Street Journal

In January, the Treasury Secretary offended Beijing with accusations of currency manipulation. Wednesday, he prompted a brief dollar selloff by failing to dismiss radical proposals from the governor of China's central bank promoting the creation of a new global reserve currency. Mr. Geithner later clarified his remarks, emphasizing his continued fandom of the greenback.

Fittingly, therefore, rhetoric was met with rhetoric. Reserve currencies are begotten, not made. The dollar's pre-eminence, like sterling's before it, stems from a range of factors including deep capital markets and military power. A replacement cooked up by finance ministers would be the monetary equivalent of Esperanto - an artificial curio. Beijing's proposal, therefore, looks more like a shot across Washington's bow demonstrating concern about U.S. profligacy.

China's options look limited, however. U.S. Treasurys constitute arguably the only market deep enough for China to invest its surpluses without creating huge distortion or unleashing rampant protectionism. Dumping Treasurys to punish Washington would trash the value of Beijing's own reserves -- and cause upheaval in the U.S., still the buyer of last resort for the goods churned out in the factories that employ China's workers. Faced with such symbiosis, it's understandable that Beijing keep jawboning Washington to show some fiscal restraint, even if the response is less than concrete.

http://online.wsj.com/article/SB123800738815540507.html

Here comes the New World Order.

China Suggests An End to the Dollar Era
March 26, 2009 | The Economist

In the future, changes to the international financial system are likely to be shaped by Beijing as well as Washington. That is the message of an article by Zhou Xiaochuan, the governor of the People’s Bank of China. Mr Zhou calls for a radical reform of the international monetary system in which the dollar would be replaced as the main reserve currency by a global currency. It is a delicate issue, however. When Tim Geithner, America’s treasury secretary, discussed the proposal in New York on March 25th, his remarks sent the dollar tumbling before he made clear that, naturally, he thought the greenback should remain the dominant reserve currency.

Mr Zhou’s proposal is China’s way of making clear that it is worried that the Fed’s response to the crisis—printing loads of money—will hurt the dollar and hence the value of China’s huge foreign reserves, of which around two-thirds are in dollars. He suggests that the international financial system, which is based on a single currency (he does not actually cite the dollar), has two main flaws. First, the reserve-currency status of the dollar helped to create global imbalances. Surplus countries have little choice but to place most of their spare funds in the reserve currency since it is used to settle trade and has the most liquid bond market. But this allowed America’s borrowing binge and housing bubble to persist for longer than it otherwise would have. Second, the country that issues the reserve currency faces a trade-off between domestic and international stability. Massive money-printing by the Fed to support the economy makes sense from a national perspective, but it may harm the dollar’s value.

Mr Zhou suggests that the dollar’s reserve status should be transferred to the SDR (Special Drawing Rights), a synthetic currency created by the IMF, whose value is determined as a weighted average of the dollar, euro, yen and pound. The SDR was created in 1969, during the Bretton Woods fixed exchange-rate system, because of concerns that there was insufficient liquidity to support global economic activity. It was originally intended as a reserve currency, but is now mainly used in the accounts for the IMF’s transactions with member countries. SDRs are allocated to IMF members on the basis of their contribution to the fund.

http://www.economist.com/finance/displaystory.cfm?story_id=13382167

UN Panel Touts New Global Currency Reserve System
March 26, 2009 | Agency France Presse

A UN panel of expert economists pressed Thursday for a new global currency reserve scheme to replace the volatile, dollar-based system and for coordinated steps by rich countries to stimulate their economies. "A new Global Reserve System -- what may be viewed as a greatly expanded SDR (Special Drawing Rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity," the panel said. As part of several recommendations to tackle the global financial crisis, the panel also noted recovery would require all developed countries, in the short term, to take "strong, coordinated and effective actions to stimulate their economies." And it stressed the need to "lay the basis for the long-run reforms that will be necessary if we are to have a more stable and more prosperous global economy and avoid future global crises."

The commission, led by US economist Joseph Stiglitz, a frequent critic of globalization and unbridled free markets, is primarily aimed at finding solutions for developing countries. On the monetary front, Stiglitz, the 2001 Nobel economics laureate, told a press conference here there was "a growing consensus that there are problems with the dollar reserve system. He noted that such a system was "relatively volatile, deflationary, unstable and (had) inequity associated with it."

This week, China's central bank chief Zhou Xiaochuan suggested the dollar could be replaced as a reserve currency by an International Monetary Fund (IMF) basket comprising dollars, euros, sterling and yen, saying it would not be easily influenced by individual countries. But the UN panel warned that a two (or three) country reserve system "may be equally unstable."

http://www.google.com/hostednews/afp/article/ALeqM5hPdAL1QnNnYKQE69vdeq63KqSTng

US Recovery Is Far Off, Banks Are 'Basically Insolvent'
April 6, 2009 | George Soros quotes via Reuters

Soros also said the U.S. dollar is under selling pressure and may eventually be replaced as a world reserve currency, possibly by the IMF's Special Drawing Rights, a synthetic currency basket comprised of dollars, euros, yen and sterling. "I think the dollar is now under question and I think the system will need to be reformed, so that the United States will be subject to the same discipline as is imposed on other countries," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992. "Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end."

China recently proposed greater use of Special Drawing Rights, possibly as an eventual global reserve currency. "In the long run, having an international accounting unit rather than the dollar may, in fact, be to our advantage so we can't splurge—you know, it felt very good for 25 years but now we are paying a very heavy price," Soros said.

http://www.cnbc.com/id/30069223

China's yuan 'set to usurp US dollar' as world's reserve currency
May 15, 2009 | The Telegraph

Professor Roubini, of New York University's Stern business school, believes that while such a major change is some way off, the Chinese government is laying the ground for the yuan's ascendance. Known as "Dr Doom" for his negative stance, Prof Roubini argues that China is better placed than the US to provide a reserve currency for the 21st century because it has a large current account surplus, focused government and few of the economic worries the US faces. In a column in the New York Times, Prof Roubini warns that with the proposal for a new international reserve currency via the International Monetary Fund, Beijing has already begun to take steps to usurp the greenback.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5325805/Chinas-yuan-set-to-usurp-US-dollar-as-worlds-reserve-currency.html

Regarding settlement - I think "replace the US Dollar" is not very precise. Lola, could you quantify that? As a percentage of reserves, maybe?

Nakagawa Says Japan Should Diversify Reserves
July 13, 2009 | Bloomberg News

Japan’s opposition party, leading in polls two months ahead of elections, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds. “In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.”

Japanese investors are the biggest foreign holders of Treasuries after China with $685.9 billion of the securities in April, and Finance Kaoru Yosano said last month his trust in the bonds is “unshakable.” The DPJ beat the ruling Liberal Democratic Party to become the biggest party in Tokyo’s city assembly in elections yesterday, boosting its prospects ahead of national polls that must be called by Sept. 10.

http://www.bloomberg.com/apps/news?pid=20601080&sid=a1jEl6I0_YhA

This new market was created as a continuation of the issues explored in this question:

http://www.hubdub.com/m54830/Will_a_new_global_reserve_currency_replace_the_US_Dollar_in_2010