There is no reserve currency alternative to U.S. dollar?

The Wall Street Journal expressed its view of the situation around the dollar and Chinese proposal to introduce a new international reserve currency. While Timothy Geithner echoed China’s offering to displace the dollar by saying that he is "quite open" to the suggestion, WST pointed to a number of weak and underestimated aspects related to the world currency reserve.

The edition noted that while China’s proposal to provide the International Monetary Fund with more authority is undesirable the U.S. government should pay serious attention to the words of Celestial Empire warning about the dangers of dollar weakness and exchange-rate instability.

Chinese central bank governor Zhou Xiaochuan believes that the IMF can create a global currency by expanding the use of its already-existing Special Drawing Rights (SDRs), a synthetic currency linked to the underlying currencies of IMF states. Yet the jounrla raises the question of who will be responsible for setting the “right price” of the SDR, saying that the IMF is not the best candidate for the role. “The multilateral institution's economic prescriptions have sent numerous nations into tailspins, particularly in Asia.”

Interestingly, the WSJ noted that national monetary authorities won’t obediently follow all the instructions and will likely use the universal system to adjust their own money supplies as they already did many times. “When the IMF allocates SDRs, recipient countries exchange them for local currencies at local central banks. That money is then used to buy real assets and facilitate trade. That exchange inflates the money supply of the domestic country that's accepting the SDRs in exchange for local currency.”

The journal stressed that it is the U.S. authorities who should be concerned about dollar stability more than China and Russia. “The dollar's status as a reserve currency gives the U.S. enormous advantages, and it should be protected ferociously by our public officials.”

The main problem with the international reserve currency is that there is no real successor to the dollar, notes WSJ. There is no economy in the world which is large enough with deep enough capital markets. And Europe cannot be viewed as such as it lacks political unity.

And while the U.S. government may rely on the dollar as reserve currency they should keep in mind that this status implies certain obligations inasmuch as U.S. monetary policy is not a policy for one nation rather it is policy for the rest of the world.

The journal says: “The dollar's sharp but needless gyrations during this decade are in our view one of the major causes of the housing and commodity asset bubbles that led to the financial panic and global recession.”

Instead of surrendering to the IMF the U.S. politicians should cooperate with “the world's most important governments and central banks” including such institutions as the Fed, ECB, and the Banks of England, Japan and China.

“The world could use monetary reform, but the goal should be to reduce currency fluctuations and enhance price stability and world trade. In the meantime, the dollar's special status is an asset worth preserving,” concluded the article.