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Obama Administration Defends US Dollar as Global Reserve Currency

U.S. officials say they foresee no change in the U.S. dollar's role as the world's primary reserve currency. The statements come in response to calls from China for the establishment of an international reserve currency that is not tied to any one country. International concerns appear to be mounting over America's skyrocketing national debt and the inflation it could spark, but so far there is no international consensus on what, if any, currency or monetary regime should replace the dollar.

Earlier this week, days before the G-20 financial summit in London, China's central bank chief called for a new international reserve currency. Asked to comment Wednesday, U.S. Treasury Secretary Timothy Geithner first said he was "open" to the idea. Moments later, he sought to clarify his remarks.

"I think the dollar remains the world's dominant reserve currency," said Geithner. "I think that is likely to continue for a long period of time. And, as a country, we will do what is necessary to make sure we are sustaining confidence in our financial markets and in the productive capacity of this economy and in our long term fundamentals."

Geithner's comments mirrored those of President Barack Obama, who was asked about the impact of his economic proposals on the value of the dollar at his news conference on Tuesday.

"The dollar is extraordinarily strong right now," President Obama said. "And the reason the dollar is strong right now is because investors consider the United States [to be] the strongest economy in the world with the most stable political system in the world."

International unease about the U.S. dollar stems from the fact that China and other nations are holding large and growing amounts of American debt, according to economist James Dorn of the Cato Institute. Dorn says, as the largest financier of U.S. deficit spending, China has particular cause for concern.

"This is the first time they have really revealed their concerns about the size of the debt that they are holding and the future of the dollar," he said. "They are very worried about it, and I am sure the Japanese and other holders of the debt are worried, as well."

Dorn says America's massive indebtedness, combined with a sharp boost in U.S. government spending, could ultimately spark inflation, which would erode the dollar's value. That erosion would diminish the value of U.S. debt held abroad.

"The U.S. government would be paying China back with cheaper dollars, depreciated dollars," he said.

Dorn says the U.S. dollar's dominance as a global reserve currency has made it easier for the United States to finance its debt without resorting to painful options like printing money or ratcheting up interest rates.

That would change if China and other nations stopped financing U.S. debt or dumped their dollar holdings in favor of another reserve currency. But economist Desmond Lachman of the American Enterprise Institute says such a course of action would be costly for China, as well.

"Once you have that large an amount of dollar holdings, you also have a stake in the dollar maintaining its value," he said. "So, were China to undermine the value of the dollar by making pronouncements or begin selling currency, they would be jeopardizing the other international reserves they are holding in the form of U.S. dollars."

In addition, Lachman says, as a major exporter, China has no interest in destabilizing the international financial system at a time of great upheaval and global economic weakness.

Nevertheless, Lachman says China's statements on replacing the dollar as the world's primary reserve currency will find a receptive audience among other nations, like Russia, that seek to challenge America's overall position as a global superpower.