Reuters reports that U.N. panel says world should ditch dollar.

(emphasis mine) [my comment]

U.N. panel says world should ditch dollar
Wed Mar 18, 2009 11:16am EDT
By Jeremy Gaunt, European Investment Correspondent

LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value [Wrong] -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years.

GOOD TIME

Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.

"There is a moment that can be grasped for change," he said.

"Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."

Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and indeed against those inside the basket.

Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.

The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.

Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.

A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.

My reaction: On top of China and Russia rethinking the dollar's status, now the UN is set to recommend dropping the dollar. I will say it again: the dollar will not survive as the world’s reserve currency.

Thanks to Bill Jencks for pointing me to this story. Here is an article from his website, slowsmile.hypocrisy.com, which reports about the likely economic impacts of this changing dollar event.

Dollar Shock!! UN Panel Says World Should Ditch the Dollar
Posted by slowsmile on 21st March 2009

In a startling article from Reuters, I have just read how a specialist UN Economic panel - The U.N. Commission of Experts on International Financial Reform which is working with the US government - has advised that the US Dollar should no longer be the World's Reserve currency. The main reason given for this economic bombshell is that the American government is clearly unable to deal with its own raging financial problems and political fires as well as with the difficult and conflicting problems associated with the world reserve dollar. This would also indicate that the current status of the American economy is much worse than is currently being reported - since America may well be heading for a period of economic depression or even bankruptcy. As I've been saying in some of my articles, many foreign countries are both fed up with the unreliable volatility and inflation of the dollar as well as from the poor paying US Treasuries which could lead to major countries dumping both dollars and Treasuries - which would cause a run on the greenback and lead to even worse economic conditions for America, perhaps even causing hyperinflation. My guess is that other regional areas and countries like China, Europe, Russia and the Middle East have already been made aware of this change in dollar status some time ago, and that America is hoping for a gracefully managed and economically painless withdrawal of the dollar as a world reserve currency. [The end of the dollar as the world's reserve currency will not be “gracefully managed” or “economically painless” for anyone involved]

Notably, and under the media blanket of the current AIG furor, this shocking and huge dollar news has not been widely reported as yet. More details are likely to become known after the G20 Summit in London in April.

The likely economic impacts of this changing dollar event will be:

*** The American government will have more economic leeway to deal with its current financial mess. [I disagree with this one. Even if the world decides to switch away from the dollar, it doesn’t change the fact that most of foreign reserves are still held in dollars. The process of foreign nations extracting themselves from the dollar is not likely to be pretty. Nations like China will suffer huge losses, and they will not be happy. This will cause political difficulties for the US on top of economic ones.]

*** Dollar value will slide considerably (possibly by 40%-50%) or the US govt. may well devalue the dollar soon in anticipation [It is already devaluing the dollar]. Good for US exports [Agreed], very bad for mainstreet Americans [Agreed]. A likelihood of high dollar inflation is still a very real possibility. [High dollar inflation is virtually guaranteed.]

*** Initial short term impacts on the release of this news will be a mass exodus from the US markets, a de-leveraging in all US stocks, bonds and dollar denominated assets. [Agreed]

*** Due to the inevitable reduction in purchase and holdings of US Treasuries and dollars, the American government will now have to find another way of paying its debts and generating credit. The American govt. will, therefore, have no choice but to tax its own citizens and businesses more heavily [or cut spending]. American financial habits and lifestyles will be forced to change radically because of this event. [Agreed]

*** Regional currencies will spring up. As I have reported - both China (Yuan) and the middle East (Khaleeji) will be introducing their own regional currencies soon. Russia will also be using her rouble currency as a regional reserve asset. [Agreed]

*** Gold and other precious metals, as a currency asset, will become much more important. The demand and price of gold and silver will go up because these new regional currencies will be much more competitive than a single currency hegemony. [Agreed]

*** Any currency that is not associated with a regional currency, like the UK pound sterling, will be left out in the cold and suffer badly. Currencies like the Euro - already a regional currency - may initially do well (as a safe haven). [Disagree. The single biggest factor which will determine the fate of currencies around the world is the economic strength of the nations backing them. For example, the pound will fall because of the horrible fundamentals underlying the UK economy. The currencies of nations who were more responsible, like Norway and Algeria, will fare well despite not being part of any regional group.]

*** The price of oil will rise. [in dollars. The price of oil in other currencies will probably fall because of disappearing demand from the US.]

*** Economic power and wealth will inevitably shift and move from the West to the East. [To an extent. The US will lose influence to Asia (mainly China). Europe’s relative influence will probably remain unchanged.]

Conclusion: The world is shifting away from the dollar, and the impact of this shift will be huge. More on this development in my next entry.