* China asks for reserve currency discussion at G8
* Euro spikes vs dollar as headlines reach investors
* Analysts say reaction overdone
By Nick Olivari
NEW YORK, July 1 (Reuters) - Foreign exchange investors reacted quickly to news from anonymous sources that China is requesting a reserve currency debate at next week’s meeting of the Group of Eight economies, but few believe it will happen.
While the euro, the only possible alternative to the dollar as an international medium of exchange, spiked after the story ran on Reuters, analysts said the reaction was overdone. For details see [ID:nL1293071]
“This is not the first time they have touted this,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank. “If it becomes an official topic, there will be a knee-jerk reaction, but most countries have the view that it will be hard to abandon the U.S. dollar.”
The debate centers on proposals by some emerging powers that an alternative should be found to the U.S. dollar as the global reserve currency to reflect the shifting balance of power in the globalized economy.
Any moves away from the dollar would obviously see the U.S. currency weaken and add to volatility in asset classes beyond foreign exchange since major commodities are denominated in dollars and most nations, including China, hold billions of dollars in U.S. debt. The value of all those assets would also erode with any drop in the dollar.
China’s central bank governor said in March the world should consider using the International Monetary Fund’s Special Drawing Rights (SDRs) as a super-sovereign currency.
But the Chinese proposal failed to gain ground after several world leaders and officials from the IMF backed the dollar as the global reserve currency.
The G8 meets July 8-10 in Italy but Eliasson said nothing will change and the topic of an alternative to the dollar is an old story.
“As soon the headline pops up there is a knee-jerk reaction,” he said.
The euro extended gains and rose as high as $1.4201 after the story reached investors, its highest since June 5 and last traded up 0.9 percent at $1.4163. The euro changed hands around $1.4131 before the news.
Marc Chandler, chief currency strategist at Brown Brothers Harriman, was quick to dismiss the news in a note to clients.
“Central bankers do not attend G8 meetings and that alone may limit such discussions,” Chandler said.
But Chandler went further and pointed out that since China is not a member of G8, they were not in a position to dictate the agenda even as their views were already well known. Further, any reforms would also be a multi-year process with no immediate impact on the dollar.
Chandler also noted the gap between what China says and what they do.
While they may want an end to the dollar’s role as the dominant currency in the global financial system, “what they do is accumulate dollars and Treasuries, with some officials acknowledging they have no choice,” Chandler said.”
Chandler added the International Monetary Fund would be the more appropriate forum for any discussions on reserve currencies and that any changes would have to have U.S. approval.
Mizuho’s Eliasson was more succinct.
“I don’t know what the alternative would be,” Eliasson said. (Reporting by Nick Olivari; Editing by Kenneth Barry)