Falling greenback fuels BRIC dollar reserve rethink

By Sebastian Tong and Peter Apps - Analysis

LONDON (Reuters) - A push by the world's leading emerging economies to dislodge the dollar as the dominant global reserve currency appears to be gaining momentum even as a weakening greenback adds further urgency to the discussion.

China on Monday added its voice to a growing international chorus seeking the replacement of the dollar as the main reserve currency, urging for an overhaul of the global monetary system to allow for wider use of Special Drawing Rights (SDRs) allocated by the International Monetary Fund (IMF).

Chinese central bank chief Zhou Xiaochuan said the SDRs, created by the IMF as international reserve assets in 1965, could be used as a super-sovereign reserve currency, eventually displacing the dollar.

His comments come a week after Russia said it would put forward a proposal for the creation of a new reserve currency issued by international financial institutions at the G20 meeting in April.

Russia said it had the broad support of its fellow BRIC countries -- Brazil, India and China -- as well as South Korea and South Africa for its proposal.

The push underscores growing concerns among emerging-market leaders about the long-term value of the dollar.

The dollar saw its biggest weekly slide since 1985 .DXY last week after the Federal Reserve's decision to buy long-term government debt raised the specter of oversupply in dollars.

That emerging economies -- among the largest dollar holders in the world thanks to strong export revenues -- want to diversify reserves away from the dollar is not only sensible but inevitable, argues Jerome Booth, Ashmore Investment Management research head.

"The unknowns are how fast and the disruption this may cause," Booth said.

DOLLAR RISKS

China, which has the world's largest foreign-currency reserves at close to $2 trillion, would be especially keen to avoid a widespread dollar sell-off.

Chinese Premier Wen Jiabao said earlier this month that he was worried about China's heavy exposure to the United States -- which, taking into account its US Treasuries and other bond holdings, is estimated to represent about a two-thirds of its reserves.

Any Chinese move to reweight its reserves portfolio could be destabilizing to the value of the greenback because of the level of market scrutiny.

"As soon as you sell-off a part of your reserves, people will expect you to sell the rest so the value of everything you have would plummet," said Jon Harrison, emerging foreign exchange strategist at Dresdner Kleinwort.

SDRs, which have a value based on a basket of key international currencies, also serve as the unit of account of the IMF and some other international organizations.