Wednesday, March 25, 2009
After Geithner said in a speech at the Council of Foreign Relations that he was "very open" to China's suggestion that the IMF's "special drawing rights" currency be used, the Forex markets went crazy, interpreting Geithner's statement as meaning that he endorsed China's call to end the Dollar as world reserve currency.
He quickly corrected his gaffe, saying that the Dollar would remain the world's currency for a long time. And Obama jumped in and reiterated that he was opposed to dropping the dollar as reserve currency. Australian Prime Minister Rudd gave his support by saying that replacement of the dollar was not on the agenda for this year's G-20 meeting. And Bernanke reiterated that he was opposed to moving away from reserve status for the dollar.
What does all of this mean?
Well, Geithner's gaffe was likely innocent (he hadn't read China's proposal at the time, and so he probably didn't understand the reporter's question).
The real meaning is that power is shifting away from the U.S.
Right on the heels of the call from China, Russia, the UN and perhaps the IMF itself for a replacement reserve currency, the fact that Obama, Geithner, Rudd, Bernanke and company are having to work so hard to reassure dollar-holders that the greenback will remain king speaks volumes.
When you have Washington Post headlines entitled "U.S. Vows To Sustain Dollar's Dominance: Geithner Defends Currency's Role", you know things are heating up.
Ten years ago, the Dollar's reserve status was so secure that they could have just laughed it off. And ten years ago, the Forex markets wouldn't have gyrated so wildly in response to Geithner's gaffe.
Whether it happens at next month's G-20 meeting (unlikely), by the end of the year, or in a couple of years, the fact is that the power of the Dollar is waning. No amount of temporary "safe haven" spikes in the Dollar can mask that long-term trend.