Dollar slides after Russia comments, BRIC summit

NEW YORK (Reuters) - The dollar fell across the board on Tuesday, pressured by comments from Russia suggesting a need for a global reserve currency other than the greenback.

An employee of the Korea Exchange Bank counts one hundred dollar notes at the bank's headquarters in Seoul February 24, 2009. REUTERS/Jo Yong-Hak

Safe-haven demand for the dollar also fell after data showed a rebound in U.S. housing starts and an unexpectedly small rise in producer prices. Investors snapped up higher-yielding currencies such as the Australian dollar.

But Russia’s dollar-negative comments dominated the market, a day after the country’s finance minister backed the greenback’s role as the world’s reserve currency.

Russian President Dmitry Medvedev said on Tuesday that existing reserve currencies, including the dollar, have not performed their function, and a new supranational currency was in the making.

“Clearly the largest holders of U.S. Treasuries are increasingly nervous about the fiscal stability of the U.S. going forward,” said Omer Esiner, senior currency analyst at Travelex Global Business Payments in Washington. “That said, I don’t think it’s to anybody’s interest to see a run on the dollar.”

In late New York trading, the euro was 0.3 percent higher at $1.3839 on electronic trading platform EBS.

The euro had gained after German think-tank ZEW said its economic sentiment index surged to 44.8 in June from 31.1 in May, exceeding expectations for a reading of 35.0 and suggesting market optimism for a recovery this year.

The dollar fell more than 1 percent against the yen to 96.43, its largest one-day fall in more than two weeks.

The ICE Futures' dollar index .DXY , which tracks the value of the greenback against a basket of currencies, dropped 0.5 percent to 80.737.


The summit of Brazil, Russia, India and China, known as the BRIC group, steered clear of any direct assault on the U.S. dollar’s dominance. However, in a joint communique the leaders of the world’s biggest emerging economies called for “a stable, predictable and more diversified international monetary system.”

A Russian delegation source also told Reuters that BRIC finance ministries and central banks were tasked to work on reserve currencies proposals.

Ronald Simpson, managing director of global currency analysis at Action Economics in Tampa, Florida, said the communique appears to “have taken some wind out of the dollar’s sails for now.”

Despite the lack of direct reference to the dollar’s future role as a global reserve currency, Simpson said BRIC’s demand for a more diversified currency system is “not exactly a subtle hint about the dollar” and suggests that over time, countries like BRIC may “start to undermine the importance of the dollar’s global standing.”

“It’s not in anybody’s best interest to bail out of the dollar right now ... but the kind of shift in global thinking has weighed the dollar down,” he said.

Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, said BRIC’s proposal to restructure the international monetary system “is premature and risks exacerbating” the global recession.

“With the BRIC nations seeking more influence and leadership, they should be encouraged to play their part in correcting the global imbalances problem by embracing more flexible exchange rates and ending the massive accumulation of foreign exchange reserves,” he wrote in a note.

Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler