In neither scenario does it make sense to hold huge amounts of dollar denominated assets today. Therefore, foreign speculators should, any day now, dump their dollar denominated assets onto the market, and so bring about the dollar decline that they so fear.

While China s government should make greater efforts to rebalance the economy by conventional measures, it also should focus more attention on adjusting the currency structure of the country s gross assets and gross liabilities. In particular, China should try to replace its dollar denominated assets with renminbi denominated assets, and its renminbi denominated liabilities with dollar denominated liabilities.

For the US, the fundamental cause of imbalances is not a strong dollar, but America s over consumption and over borrowing. A strengthening dollar would worsen the US trade balance, but a weakening dollar could cause panic in capital markets, which might push up risk premia on dollar denominated assets, including US government securities, in turn leading to an economic slowdown and a further weakening of the dollar.

Second, China s foreign assets are denominated almost exclusively in US dollars, while its foreign liabilities are denominated mostly in renminbi. As a result, whenever the US dollar declines, China s net international investment position (the difference between its external financial assets and liabilities) deteriorates and so does its investment income balance.

The actual budget increase cannot be determined simply by noting a change in the dollar denominated amount.

In November 2001, the authorities again restructured the public debt, this time exchanging dollar denominated bonds for domestic guaranteed loans.

But perhaps the strongest message is being sent via targeted sanctions on Russia s oil, finance, defense, and technology industries, as well as on Russian officials. With this approach, the US and its allies are sending a clear message to anyone who may disagree with US policy avoid using the dollar and dollar denominated bank accounts.

But foreign currency speculators and international investors are not looking forward to either of these scenarios. They continue to hold very large positions in dollar denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression.

LONDON Ten years on, the euro is a resounding success. A financial market heavyweight, it now outperforms the dollar, the yen, and, until recently, the mighty Chinese yuan, while euro denominated bond trading rivals the US market in size.

With rebalancing will come a decline in China s surplus saving, much slower accumulation of foreign exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar denominated assets. Curtailing purchases of US Treasuries is a perfectly logical outgrowth of this process.

China has recycled about 60 of these reserves back into dollar denominated US government securities, because it wants to limit any appreciation of the renminbi against the world s benchmark currency. If China bought fewer dollars, the renminbi s exchange rate up 35 against the dollar since mid 2005 would strengthen more sharply than it already has, jeopardizing competiveness and export led growth.

This fear of a stronger dollar is the real reason for concern, bordering on panic, in many emerging economies and at the IMF. A significant strengthening of the dollar would indeed cause serious problems for emerging economies where businesses and governments have taken on large dollar denominated debts and currency devaluation threatens to spin out of control.

Annex I, table 1 US dollar statements

America depends on China s trade surplus and savings to finance its outsize budget deficits, while China relies on its huge exports to the US to sustain its economic growth and finance its military modernization. By plowing more than two thirds of its mammoth foreign currency reserves into US dollar denominated assets, China has gained significant political leverage.

Domestically oriented macroeconomists look at the situation roughly like this at some point in the future, foreign central banks will become less willing to continue buying massive amounts of dollar denominated securities in order to prop up the greenback. When they cease their large scale dollar purchase programs, the value of the dollar will fall and it will fall hard.

The exchange rate was approximately Rp 9.000, to One US Dollar.

The policy of making an allowance of 10 per cent of non United States dollar denominated outstanding accounts receivable as at 31 December as a provision for delays in the collection thereof, is discontinued effective 31 December 2003.

Of course, an earlier attempt was made to create a commercial market in SDR denominated claims. Back in the 1970 s, there was some limited issuance of SDR denominated liabilities by commercial banks and SDR denominated bonds by corporations.

So it is very likely that when the global economy has returned to a sort of normality and safe haven demand has declined, the prices of US government securities will fall and their yields will rise. As a result, China s dollar denominated foreign exchange reserves, which account for the largest share of all the foreign holdings of US government securities, will suffer interest rate losses.

During the 1997 1998 Asian financial crisis, East Asia s economies paid heavily for excessive accumulation of dollar denominated debts. Because governments failed to defend their currencies, they lost hundreds of billions of dollars in foreign exchange reserves to international speculators.

The value of loans denominated in renminbi CN 188 billion ( 29.2 billion) is tiny, especially when one considers that almost 50 of total international banking liabilities are denominated in dollars, approximately 30 in euros, 5 in pounds, and about 3 in yen. And the renminbi accounts for 0.6 1 of global foreign exchange reserves held by central banks, whereas the dollar and the euro account for 62 and 23 , respectively.

Triffin issued his warning more than 50 years ago, but it has recently gained traction, as China s rise has made the world increasingly disinclined to tolerate the instability caused by a dollar denominated system. The solution, however, lies not in replacing the dollar with the renminbi, but in strengthening the role of the world s only truly global currency the IMF s Special Drawing Rights.

Although these factors insulate the US from the inflationary pressures stemming from exchange rate fluctuations, they increase the vulnerability of other countries, especially emerging economies. Because the dollar prices of most of these countries imports are not very responsive to exchange rate movements, the pass through of those movements into import prices denominated in their home currencies is close to 100 .

b Total public debt denominated in pesos and foreign currency.

A sharp weakening of the euro towards parity with the US dollar, which is unlikely, as the US is weak, too.

The third factor is the vicious circle of oil prices and the value of the US dollar. Higher oil prices increase America s trade deficits, which in turn lower the value of the dollar. Owing to the inverse relationship between oil prices and the dollar, the weaker dollar increases oil prices, which increases the trade deficit further, putting more downward pressure on the dollar.

Second, because most exporters also import intermediate inputs that are priced in dollars, exchange rate fluctuations have a limited impact on their costs and thus on their incentive to change dollar prices. And, third, exporters who wish to preserve their share in world markets where prices are largely denominated in dollars choose to keep their dollar prices stable, to avoid falling victim to idiosyncratic exchange rate movements.

On one level, this is very frustrating we economists believe that people are smart enough to understand their situation and capable enough to pursue their own interests. Yet the typical investor in dollar denominated assets whether a rich private individual, a pension fund, or a central bank has not taken the steps to protect themselves against the very likely dollar decline in our future.

A fluctuating US dollar placed additional pressure on projected expenditures to the end of the year.

However, he believed that as the interest rate rise cycle of the Hong Kong Bank began and the Hong Kong dollar interest rates were normalizing, the situation that Hong Kong dollar interest rates were lower than US dollar interest rates would change in the future.

The trend of Hong Kong dollar interest rates and US dollar interest rates will be more consistent. Everyone must be more careful to manage risks and prepared to cope with market fluctuations.

But the foreman was kind enough to give us each a check for a dollar, but my mother would never let us cash it.

This reflects the fact that the market in dollar denominated assets is exceptionally deep and liquid, which limits transaction costs. In other words, European practice reflects the dollar s exorbitant privilege as the only true global currency, freely accepted by currency traders and investors in China and around the world.

Many developing countries have made progress since the 1990 s in shifting from dollar denominated debt toward foreign direct investment and other types of capital inflows, or in paying down their liabilities altogether. But some commodity exporters still seek ways to borrow that won t expose them to excessive risk.

But if the US does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the US dollar would rise significantly. America s foreign creditors would not accept a sharp reduction in their dollar assets real value that debasement of the dollar via inflation and devaluation would entail.

But there is no question whatsoever that the US dollar will go south in the long run a depreciation that started in April 2002 and, after a short interval, resumed in March 2009. Unless the US economy improves its trade balance, the dollar will fall.

A new economic order was established after World War II, with the US as the anchor country. The Bretton Woods system linked the US dollar to gold at 35 per ounce, with other currencies linked to the dollar (though occasionally allowed to make adjustments).

Whether for self insurance or to maintain a competitive exchange rate, East Asia has since then accumulated a huge volume of dollar denominated assets. This time around, thanks to the deterioration of the US fiscal position and the Federal Reserve s expansionary monetary policy, the long term risk for emerging markets external balance sheets is shifting, as Eswar Prasad of the Brookings Institution has pointed out, to the asset side.

If rich country central banks can buy long term bonds, then emerging country central banks can buy dollar denominated bonds. Even countries that practice inflation targeting and have otherwise vowed to let their exchange rates float Brazil, Colombia, Peru, and Chile, for example have done it, and in large quantities.

America should not pin too much hope on a weakening dollar to correct its trade imbalances. For the US, the fundamental cause of imbalances is not a strong dollar, but America s over consumption and over borrowing.

The yen s value against the US dollar has declined by more than 7 in the last month. With the euro rising relative to the dollar, the yen s fall relative to the euro has been even greater.

Second, the system is unstable, because it makes the major reserve currency s value dependent on US macroeconomic policy and the vagaries of the US balance of payments and associated domestic deficits. Since the abandonment of gold dollar parity in 1971, the world has experienced increasingly intense cycles in the value of the dollar and the US current account.

When capital flows out of the country as is happening now in some emerging markets it may be helpful if the central bank allows the currency to depreciate in an effort to boost exports and reduce imports. But if the country s borrowers have a lot of dollar denominated debt, depreciation can be ruinous.

While China has taken minor measures to slow the increase in its dollar denominated holdings, it has been unwilling to risk a fully convertible currency for domestic political reasons. Thus, the renminbi is unlikely to challenge the dollar s role as the largest component of world reserves (more than 60 ) in the next decade.

Such developments would cause US debt yields to spike, disrupting growth. The dollar would become weaker, leaving investors wrong footed.