G-20 to Debate Changing Dollar for Currency Basket, Mantega Says

Brazilian Finance Minister Guido Mantega
Brazilian Finance Minister Guido Mantega. Photographer: Andrew Harrer/Bloomberg

Brazilian Finance Minister Guido Mantega said the Group of 20 nations may discuss reducing the dollar’s role as a reserve currency in favor of a basket that could include the real and yuan.

“The U.S. economy used to reign absolute, it was the strongest economy in the world and stood out from the others,” Mantega said at a press conference in Seoul. “Today that is no longer the case.”

The percentage of dollars held in reserves stockpiles throughout the world has dropped to 62 percent as of the end of June, from as high as 64 percent at the beginning of 2008 and a record 73 percent in 2001, according to International Monetary Fund data. The greenback is down against all but five of the 25 emerging market currencies tracked by Bloomberg this year, as near-zero U.S. borrowing costs spur record inflows of capital into higher yielding assets in developing economies.

The largest emerging nations are calling to reduce the dollar’s importance in the global financial system as they try to competitively devalue their exchange rates to bolster exports. Mantega said the “currency war” will be the main theme for Brazil at the G-20 meeting.

‘Moment’

A new system could see reserves made up of dollars, euros, yen, British pounds, yuan and reais, Mantega said. China’s yuan jumped to its strongest level against the dollar since 1993 today, amid speculation regulators in the world’s fastest growing economy will permit the managed currency to appreciate at a faster pace before the summit in Seoul.

“Now is the moment to think about a transition where there would be new currencies that would be the parameters for international trade,” Mantega said.

China is unlikely to support a framework where the yuan becomes a staple of reserve stockpiles around the world because that would mean making the currency fully convertible and allowing more inflows in to the country, said Beat Siegenthaler, a currency strategist at UBS AG.

“This more shows the helplessness of countries like Brazil in the face of quantitative easing, there’s not much they can do about it so they lash out,” Siegenthaler said by phone from Zurich. “They can criticize the U.S. and bring up this idea of replacing the dollar in reserves but in reality the U.S. couldn’t care less.”

The dollar climbed to a four-week high against the yen today and rose versus the euro as an increase in Treasury yields made assets denominated in the greenback more attractive to international investors.

Criticism

The U.S. is likely to face criticism at the summit for the Federal Reserve’s $600 billion planned purchase of Treasuries, announced Nov. 3, Mantega said. Quantitative easing will inflate asset bubbles in emerging markets without reviving the U.S. economy, he said.

G-20 nations need to pressure President Obama to engage in further fiscal stimulus, Mantega added.

“We can’t go on with the monetary system that we have today which is that the dollar dominates as the reserve currency together with the euro and the yen,” Kobsidthi Silpachai, head of capital markets research at Thailand’s Kasikornbank Pcl, said by phone from Bangkok. “If those currencies continue to depreciate everybody suffers.”

The Brazilian real weakened for a fourth straight day in Sao Paulo, slipping 0.1 percent to 1.7025 per dollar at 8:04 a.m. in New York.

The Brazilian real has more than doubled in value since President Luiz Inacio Lula da Silva took office in January 2003, with investors lured by the highest interest rates in the G-20, adjusted for inflation. The central bank raised the nation’s benchmark interest rate this year 2 percentage points to 10.75 percent.

Consumer prices rose 5.20 percent in the year through October.

Brazil tripled a tax last month that foreigners must pay to invest in the country’s debt to try and limit inflows of capital that helped drive the currency to a two-year high on Oct. 13. They also levied a 6 percent tax on foreigners entering the Brazilian derivatives market.

Policy makers will continue to stem gains in the real and discourage short-term foreign investment in the country, Mantega said.

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