Greenback Losing Ground as Global Reserve Currency

25 Jun 2009

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US senator, Sam Brownback called the SCO (Shangai Cooperation Organisation), "The most dangerous institution, the American people have never heard of."

Founded in 2001, the SCO consists of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Mongolia, India, Pakistan and Iran have observer status.

The organisation aims to promote mutual cooperation and maintain regional peace, security and stability.

On 16 June 09, the SCO hosted its annual meeting in the Russian city of Yekaterinburg.

At the meeting, Chinese president Hu Jintao called for joint efforts by the organisation to ride out the world's financial difficulties. While Russian president, Dmitry Metvedev called for a new reserve currency, in addition to the dollar, to stabilise global finances.

Commenting on the SCO meeting in Truthdig, American columnist Chris Hedges argued, "(t)his week marks the end of the dollar’s reign as the world’s currency." He said that the meeting was the "first formal step by (America’s) major trading partners to replace the dollar as the world's reserve currency. If they succeed, the dollar will dramatically plummet in value, the cost of imports, including oil, will skyrocket, interest rates will climb and jobs will haemorrhage at a rate that will make the last few months look like boom times."

But the SCO is not America’s only worry. Three SCO countries also dominate the BRIC bloc. BRIC countries represent the four strongest developing country economies in the world. They are Brazil, Russia, India and China.

As a result, another important meeting was also organised around the SCO event. This second meeting was billed as the formal debut meeting of the BRIC countries as a bloc.

The manner in which the SCO and BRIC countries position themselves has significant implications for the future of the global economic order. They are shifting the global power balance.

In a Russia Today report, Medvedev said due to their large populations, the BRIC countries hold half the world's people. "We need to make sure our countries, where billions of people live, take part in defining the new rules. Otherwise we'll regret it bitterly afterwards," argued Medvedev.

He added that it was "meaningful" that the four countries had come together to talk about the future of the world's economic architecture.

Major news channels covering the event reported that the BRIC countries could barely hide their frustration with the US since the global crisis began, expressing discomfort with Washington’s financial stewardship.

Why the frustration with the US? BRIC nations only have a 15% share of the global economy. However, they hold 40% of global hard currency reserves. Russia and China are some of the biggest holders of the dollar outside the United States and they both seek to lessen their reliance on the currency.

China, especially, has invested in US dollars for years and in return, American consumers bought Chinese made goods. But with the financial meltdown, the US may have to print more money, which could cause inflation and lower the value of China's dollar holdings.

China's Hu Jintao said, "I am very worried and I want to send this message to the United States. I hope the country will honour its worth, maintain its credibility and ensure the safety of Chinese assets."

In the meantime, emerging economies are already excluding the dollar in their trade agreements with each other. For example, China and Argentina recently signed a deal worth 70 billion Yuan.

Writing in Asia Times Online and adding an interesting angle to the debate on the future direction of the global economic order, Francesco Sisci says, "The Yuan Lies in Waiting."

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