MercoPress. South Atlantic News Agency

UNCTAD joins the “replace the US dollar” debate

The strongest candidate for such a move IMF’s SDR

The United Nations has stepped into the debate on the future of the US Dollar, mainly that it be replaced as the world's reserve currency. The idea has been floating for some time in world capitals, such as Beijing, Moscow, Tehran and Brasilia but is the first time the world organisation openly takes position.

The UN Conference on Trade and Development, UNCTAD, has said in its new report that trade imbalances and the breakdown in the way currencies and capital rules work was 'largely' responsible for the financial crisis. Although this fact has been pointed out by many economists and politicians, no-one has spelled out a potential solution - until now.

It is calling for the biggest overhaul of the world's monetary system since World War II. In effect, it is suggesting that a new composite or artificial currency be created, that would be a weighted basket of major currencies. In other words, rather than having the US dollar as the sole reserve currency, the new system would bring in a range of currencies that should balance out into a more stable system.

The idea would be to use the IMF Special Drawing Rights (SDR), which are formed from a basket of currencies but are used for accounting purposes only. Under the plan, the 'supranational' currency would start to be used for active trading.

Detleft Kotte from UNCTAD said that “replacing the dollar with an artificial currency would solve part of the problem related to potential for countries to run large deficits, and would therefore help to bring stability.” It would require a new Bretton Woods equivalent structure, or Bretton Woods II.

It would require international exchange rates to be managed, such that central banks would have to support or suppress their currencies depending on how they were fairing against other currencies.

This in turn would mean that surplus countries such as Germany and China would have to stimulate more domestic spending, whereas deficit countries such as the US and UK would have to save more.

BRIC members (Brazil, Russia, India and China) have all come out in favour of using the SDR as an alternative reserve currency. One of the advantages from their point of view is that the SDR is regularly re-weighted based on capital flows.

In 2006, it was set at 44% for the US Dollar, 34% for the Euro, and 11% each for the British Pound and Yen. As the BRIC countries grow in economic importance, potentially coming to dominate the world economy by 2050, the SDR may be a way for them to manage the transition of their currencies into the SDR, and possibly by then forming its majority.

The dollar has been dropping against all currencies and gold has just broken through the 1,000 US dollar barrier, signalling a further loss of faith in the greenback and greater fears of inflation.