Reply #38: China's dollar-dump plan to be G7 focus

[UpInArms]

http://www.marketwatch.com/news/story/Chinas-dollar-dump-plan-G7/story.aspx?guid=%7BDFCB68AC%2D8BC2%2D4359%2DA1CA%2D76542EAFBA1E%7D

LONDON (MarketWatch) - While foreign exchange is unlikely to be the subject of bold public pronouncements when the world's most powerful finance ministers and central bankers meet Friday in Washington, China's call for the replacement of the U.S. dollar as the world's leading reserve currency is likely to be a hot topic behind closed doors, currency strategists said.

Namely, foreign-exchange traders will be looking for any clues to discussions with Chinese officials as policy makers around the world attempt to piece together the implications of remarks by China central bank governor Zhou Xiauchuan in March for the eventual replacement of the U.S. dollar as the world's main currency with special drawing rights, the quasi-currency issued by the International Monetary fund.

The implication of such a policy would be a weaker dollar, as central banks move to diversify away from the world's largest reserve currency. And that's something that makes a number of policy makers, including officials from the 16-nation euro zone, nervous, analysts said.

The prospect of a substantially weaker dollar is unwelcome to policy makers in the euro zone, Japan or other countries worried about their own exports.

The main thrust of China's message is that it wants to diversify holdings of foreign exchange reserves in a way that more closely mimics the make-up of SDRs, said Simon Derrick, currency strategist at Bank of New York Mellon.

That means going from reserve holdings that stand at more than 60% dollars to around 44%. For the euro, holdings would rise to around 34% from 31%.

...more...