With India purchasing of 200 tonnes of gold from the IMF for US$ 6.7 billion last week — a far cry from the 67 tonnes of gold that India had to humiliatingly pledge in 1991 to stave off an imminent forex crisis — the debate on the need to diversify the forex reserves of the surplus countries has gathered fresh momentum.
Some developing countries have argued that the pain of structural adjustments in their economies consequent to the global financial meltdown has been felt more by countries other than the US because, unlike others, the US can pay for its massive imports in its own domestic currency. This is facilitated by the pre-eminent role of the dollar as a global currency that is held as reserves by countries with surplus trade balances.
China has been known to be actively diversifying away from the dollar over the last few months by investing in strategic holdings of non-ferrous metals and oil wells abroad but with nearly $2 trillion in foreign currency reserves, it has not much of an option but to participate in the process of adjustment in the global balance of payments in order to ensure the safety of its massive financial claims on the rest of the World.
Over the last few months discordant notes have been emanating from several countries holding large dollar reserves questioning the special safe haven status enjoyed by the dollar and the inability of the US as the issuer of the global currency to maintain its value. With the dollar depreciating by upwards of 20% vis-à-vis the major currencies — euro, yen and British pound since the onset of the global financial crisis, there is an urgent need to arrest the falling value of the dollar reserves of the reserve holding countries.
Being the issuer of a global currency is indeed a special privilege enjoyed by the issuer country but along with this privilege comes the possibility of running large current account deficits because of the requirement to supply large quantities of the currency.
Source : The Economic Times