This is much worse>
Alexei Kudrin, Russia's finance minister, dropped a bombshell in Washington over the weekend.
Attending the annual meetings of the World Bank and International Monetary Fund, Kudrin caused his American hosts discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.
The greenback's recent volatility and the yawning US trade deficit, "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability."
Kudrin's intervention coincided with another meeting, also in Washington, of finance ministers and central bankers from the Group of Seven - which doesn't include Russia.
Top of the agenda: the effect of ever-rising oil prices on inflation and interest rates.
G7 countries are worried the spiraling price of crude - which closed at $72.79 a barrel on Friday and which has now trebled in three years - could inflict real economic damage. The US Federal Reserve, in particular, has been forced to take drastic action - raising interest rates 15 times since June 2004 to keep inflation in check.
Given that fragility, it is significant that Kudrin is now wondering aloud if the long-standing dollar hegemony can last. For him to do so is to highlight that America is vulnerable should that status be lost. That's because Russia, with its awesome oil and gas reserves, could kick-start a challenge to the dollar's supremacy.
Most nations stockpile their foreign exchange holdings in dollars. The US currency accounts for more than two thirds of all central bank reserves worldwide.
This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the US economy.
And now, with massive trade and budget deficits to finance, America is increasingly reliant on that status. The unprecedented weight of US liabilities means a threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession. |
