World Bank backs strong dollar, plans trade boost

By Lesley Wroughton and Stella Dawson

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

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

The Organization for Economic Co-operation and Development said on Tuesday that world trade was in free fall and should decline by 13.2 percent in 2009 as the economic crisis cuts demand across the globe.

Zoellick said the program would include funding from governments, starting with contributions from Britain and the Netherlands, regional development banks and private-sector banks such as Standard Chartered, Standard Bank and Rabobank.

He said it was an example of how multilateral institutions like the World Bank could be used to help fix problems related to the financial crisis.

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 principal reserve currency. The question will be whether you have complementary measures," Zoellick said in an interview with Reuters.

CHINESE PROPOSAL

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 were worth discussing, for instance to increase international liquidity, Zoellick said that did 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 would take more than a G20 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."

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 was a healthy development showing its engagement in the international financial system.