World Bank backs U.S. dollar as reserve currency

Lesley Wroughton and Stella Dawson

World Bank backs U.S. dollar as reserve currency

Lesley Wroughton and Stella Dawson, Reuters  Published: Tuesday, March 31, 2009

LONDON -- The dollar will remain the world's dominant reserve currency and a strong U.S. currency is critical to lifting the world out of economic and financial crisis, World Bank President Robert Zoellick said on Tuesday.

Speaking at a newsmaker event at Reuters' London office, Zoellick announced a US$50-billion program to reverse a sharp drop in trade in the global crisis and urged G20 leaders to back the effort.

But he played down the chances of a dethroning of the dollar as the world's leading currency.

"I think the dollar will remain the principle reserve currency. The question will be whether you have complementary measures," Zoellick said in an interview with Reuters.

China has provoked debate about the dollar's status as the world's main unit of exchange by suggesting the wider use of Special Drawing Rights (SDR) created by the International Monetary Fund as an international reserve asset.

While those ideas are worth discussing, for instance to increase international liquidity, Zoellick said that does not change the importance of the dollar.

"A dollar-based system and a strong dollar ... will be critical to pull us out of this hole. Over time, however, you will see discussions over the role of the dollar," he said

Given the important role the U.S. dollar plays in the global financial system, it is incumbent upon the United States to pursue sound economic, fiscal and monetary policies, he said.

"It is appropriate to discuss the monetary system but one also has to be sensible and not throw out the baby with the bath water," Zoellick said.

Moreover, it would take more than a Group of 20 summit to establish a new reserve currency, which requires functioning financial markets.

"To create a reserve currency you need to have more than a summit or a meeting, you have to create financial markets where people feel comfortable moving in and out of the currency," he added.

If the Chinese yuan is to start playing a larger role, it will require full convertibility of its currency and greater transparency, he said. However, China's contribution to the debate is a healthy development showing its engagement in the international financial system, he said.

DANGEROUS YEAR

The World Bank chief also said the world economy faces a "dangerous year" and could stumble deeper into recession.

"Everyone needs to approach this crisis with a healthy dose of humility because we've seen surprises, we still face high uncertainty," he said.

"It remains a dangerous year in terms of downside risks."

Zoellick said the Bank had revised down its growth forecast for the world economy in 2009 to -1.7% -- below the IMF's most recent forecasts but still well shy of a 4.3 percent contraction predicted on Tuesday by the OECD.

He said growth would continue in China, albeit at a lower level, and the United States should begin to show signs of recovery, seeding a broader recovery.

"If the U.S. can follow through on its banking program - there is a reasonable chance that you will start growth in the U.S. first, whether it is 2009 or 2010 is a little bit hard for me to tell," Zoellick said.

G20

The World Bank president said his priority at the G20 financial summit of the world's largest industrialized and developing countries on April 2 is to ensure that leaders not only debate reform and regulation, but also consider balanced global growth.

"It would be a big mistake if it were to become a summit of high finance without focusing on the poor," he said.

He is pressing leaders to contributing 0.7% of GDP to a vulnerability fund. Investment in the poorest regions, such as Africa and Asia, to raise productivity will bear divides by achieving more balanced economic development, he said.

To this end, the World Bank is promoting a trade finance initiative.

© Thomson Reuters 2009

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