Expert: U.S. should 'give up on the dollar'

chart_ws_currency_usd_eur.top.pngCilck the chart for more FX data. By Ben Rooney, staff reporter


NEW YORK (CNNMoney) -- The push to replace the U.S. dollar as the world's reserve currency has been gaining steam, with one expert arguing that America "must give up on the dollar."

In a Financial Times op-ed, Michael Pettis, a finance professor at Peking University, said U.S. policymakers should lead the charge to create a more diverse reserve system, "in which the dollar is simply first among equals."

The dollar has been the dominant reserve currency for decades, with central banks and other institutions around the world amassing vast reserves.

Pettis argues that this has resulted in dangerous trade imbalances that threaten to destabilize the global economy. He contends that countries such as China have been able to "game the system" by stockpiling dollars, which has allowed them to grab a larger share of global demand for goods and services.

At the same time, the U.S. economy has suffered as money rushes out of the country and into red-hot emerging markets. Pettis said this leaves the United States with a stark choice between further pain in the job market, as demand continues to shift overseas, or adding to already massive deficits to finance domestic growth.

"Americans, in other words, must choose between higher unemployment and higher debt," Pettis wrote.

As such, the United States may eventually need to force the rest of the world to gradually "disengage" from the dollar as a reserve currency if it continues to decline.

The dollar index, which measures the greenback against a basket of currencies, has fallen 5% so far this year to around 74.80. That's down from a high near 87 in June of 2009, as jittery investors flocked to the dollar for safety.

However, there is not an obvious alternative to the dollar.

Pettis suggested that the euro could emerge over the next decade, since no other world currency has "the necessary characteristics to allow it plausibly to serve the needs of the global economy."

But he suggested that European officials would resist taking on the responsibility, since it would saddle the European Union with the same burdens currently facing the United States.

Meanwhile, the International Monetary Fund has proposed a larger role for its special drawing rights, or SDRs, in the global reserve system.

SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends funds to countries denominated in SDRs.

The global monetary system and the dollar will be discussed this weekend as finance officials from the Group of 20 economies gather in Washington for the spring meetings of the International Monetary Fund and the World Bank.

The dollar found some support Friday as investors turned cautious ahead of possible policy changes stemming from this weekend's summit.

"Today's risk will come from sideline comments from the G20 and IMF meetings as well as the deluge of U.S. data," said Camilla Sutton, chief currency strategist at Scotia Capital.

Investors are also focused on the outlook for global interest rates, as central banks adjust to rising inflation.

China reported Friday that overall consumer prices rose 5% in March, as energy and food prices have surged. China's central bank has been gradually raising interest rates this year to help cool inflation.

In Europe, consumer prices rose 2.7% in March versus last year, according to data released Friday from EuroStat. The European Central Bank hiked interest rates last week for the first time since the 2008 financial crisis.

U.S. inflation also picked up in March, driven mainly by rising gas prices. Excluding food and energy prices though, inflation remains relatively tame.

While many investors and economists expect the Federal Reserve to maintain its low interest rate policy for some time, some central bank officials have been calling for a tighter stance to ward off inflation.

"The biggest risk to a change in the downward US dollar trend is a shift in stance at the Fed," said Sutton. "At some point the Fed will move away from emergency level interest rates and the US dollar will likely rally temporarily." To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.23%4.25%
15 yr fixed3.23%3.21%
5/1 ARM3.45%3.56%
30 yr refi4.14%4.14%
15 yr refi3.16%3.13%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,106.70 29.83 0.17%
Nasdaq 4,570.64 13.29 0.29%
S&P 500 2,000.02 2.10 0.11%
Treasuries 2.36 -0.03 -1.13%
Data as of 9:02am ET
Company Price Change % Change
Intel Corp 34.80 -0.01 -0.03%
Microsoft Corp 45.00 -0.16 -0.37%
Regions Financial Co... 10.26 0.04 0.39%
AbbVie Inc 55.75 -0.12 -0.21%
Comcast Corp 54.56 -0.09 -0.16%
Data as of Aug 26

Sections

Shrinking demand for rifles pulls down gun maker's quarterly profit by 45%. More

University of Utah professor Michael Glauser cycled 4,000 miles this summer, visiting 100 entrepreneurs across the country. Here's a snapshot of how they grew their businesses. More

Apple is expected to launch the iPhone 6 in two weeks, but waiting until then to sell your old iPhone means you're way late to the game. More

The Coolest Cooler launched a Kickstarter campaign in July and has raised over $9 million so far, the second highest grossing campaign ever. More

Mary Fallon, from Durham, Maine, is a mother of three children, two dogs, 25 chickens and a flock of 22 sheep. Here are journal entries from a day in her life. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.