Wednesday, November 18, 2009

'Basket' should replace U.S. dollar as reserve currency, IMF says

BEIJING -- The imperative of greater global currency stability means the world can no longer rely, as it has done since the end of the gold standard, on a currency issued by a single country, the head of the IMF said on Tuesday.

Dominique Strauss-Kahn, the managing director of the International Monetary Fund, restated his view that a new global currency might evolve out of the Special Drawing Right, the Fund's in-house unit of account.

"That probably has to be a basket," Strauss-Kahn said of the eventual replacement for the dollar. "In a globalised world there is no domestic solution," he told a forum.

Speaking later at a news conference, Strauss-Kahn reiterated the message that has been a constant refrain during his visit -- that China needs a stronger yuan as part of a package of policies to help rebalance its economy by promoting domestic demand.

"For us, because it just is consistent with the new economic policy in China, the sooner the better. How fast? It will take time. It is not something which will change in one step overnight," Strauss-Kahn said.

China has kept the yuan, also known as the renminbi (RMB), pegged around 6.83 per dollar since July 2008, following a 21% rise over the previous three years, to help its exporters weather the global economic crisis.

"We do believe firmly in the IMF that the RMB is undervalued and that it is not only in the interests of the global economy but also in the interests of China to have a revaluation of the currency," he said.

An undervalued currency introduces economic distortions, which might confer certain advantages but at a cost to other parts of the economy, Strauss-Kahn said. In China's case, a cheap currency gives it an edge on trade but scrambles price signals, leading to wrong decisions about investment in the long run.

"It is now time for China, having accumulated a lot of advantages from an undervalued currency, to look more forward to investment and long-term stability, and this long-term stability goes with getting rid of this distortion," he said.