French President Nicolas Sarkozy brings his campaign to blunt the dollar’s dominance as a reserve currency to the White House next week.
The French leader may find U.S. President Barack Obama unwilling to budge at their Jan. 10 meeting on giving up the dollar’s role and offer little in the way of alternatives.
Sarkozy, who this year holds the presidency of both the Group of Eight industrial economies and the wider G-20, has made re-jiggering the monetary system one of his priorities, along with controlling volatility in commodity prices. The European debt crisis that has rocked the euro isn’t on his G-20 agenda.
“In the absence of a new crisis, there is no incentive for the U.S. to move away from a U.S. dollar-centric system,” Chile’s Finance Minister Felipe Larrain said at a conference in Paris on Jan. 6. “We are in a state of flux in the international monetary system. The problem is that we don’t really have a perfect substitute.”
A Sarkozy aide who briefed reporters said the meeting isn’t designed to yield decisions. Sarkozy has also met in recent months with the heads of China, India and Germany. The French plan to organize a series of “seminars” on monetary issues and say specifics won’t be presented until a G-20 summit in the Mediterranean resort of Cannes Nov. 3-4.
French officials say their goal isn’t to dethrone the dollar. They want to open a debate to reflect changes since the 1944 Bretton Woods conference established the U.S. currency’s role. Sarkozy and Finance Minister Christine Lagarde have said the dollar’s prominence contributed to the financial crisis by encouraging global imbalances.
“Without defending or questioning the role of any specific currency, we can see that new economies have come to the fore during this recent crisis, and yet we have a world which for the time being is a single-currency world,” Lagarde said Jan. 6. “We need reserves that are surer and more stable.”
The dollar declined to as low as $1.6038 against the euro in July 2008 and rose to $1.1877 in June 2010.
One-month implied volatility on the euro versus the dollar has averaged 14 percent since the collapse of Lehman Brothers Holdings Inc. in September 2008, reaching a record 29 percent in October of that year. That compares with an average of 9.7 percent in the previous 10 years. The reading was 13.5 percent today.
Sarkozy, who arrives in Washington from Martinique and Guadeloupe with his wife Carla Bruni-Sarkozy, will provide more details of G-20 plans at a Jan. 24 press conference in Paris.
“The two leaders will discuss French leadership this year of the G-8 and G-20 and how to strengthen the global economic recovery and create jobs,” White House spokesman Tommy Vietor said. “As close allies, the presidents will also review the situations in Afghanistan, Lebanon, Iran, Ivory Coast, Sudan and Middle East Peace efforts.”
As his G-20 presidency approached last year, Sarkozy backed off from criticizing the dollar and also dropped earlier disapprovals about China’s yuan peg.
“We have to update the international monetary system for the 21st century,” Sarkozy said at the G-20 summit in Seoul in November. At the World Economic Forum in Davos a year ago, he said: “We can’t have on one hand a multipolar world and on the other hand a single reserve currency” and said “there will be no return to financial and economic order if we allow currency disorder to continue.” He’d made similar comments in August 2009 to ambassadors gathered in Paris for their annual meeting.
De Gaulle Echoes
Sarkozy’s agenda echoes policies dating to the 1960s, when Charles de Gaulle converted much of France’s dollar reserves into gold, accelerating events that led the U.S. in 1971 to abandon the gold standard and usher in an era of floating rates.
“Having the international economic system in the 21st century dependent on the currency of a single country is an anomaly,” Nobel Prize-winning economist Joseph Stiglitz said in an interview in Paris Jan. 6. “But a multi-currency reserve system could be even more unstable as central banks shift from one to another.”
Sliglitz said he favors a system based on supra-national currencies such as the International Monetary Fund’s Special Drawing Rights, though that would require many changes to how SDRs are issued and used which the U.S. may oppose.
“Greater reserve use of the SDR has a very big challenge: you have to have an expanded use of SDRs,” said Chile’s Larrain. “I’m skeptical the SDR can play a much larger role in a short period of time.”
Larrain said a gradual slide away from a reserve use of the dollar is more likely, noting that the dollar’s share of world central bank reserves fell to 61 percent from 71 percent in a decade, with the euro accounting for most of the switch.
Sarkozy will be accompanied in Washington by Lagarde and by Foreign Minister Michele Alliot-Marie.
His wife plans a lunch with first lady Michelle Obama.
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