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Wednesday, March 17, 2010

Global FX reserve system needs reforms - ADB chief

The current dollar-denominated global reserve system needs to be reformed to better fit economic reality and ensure global financial stability, the head of Asian Development Bank said on Wednesday.

ADB President Haruhiko Kuroda also said robust growth in developing Asia could prompt a surge in capital inflows to the region, leaving Asia vulnerable to more volatile exchange rates and exacerbating trade and other imbalances.

That will put more pressure on a global reserve system that is already scored with fault lines, he added.

"That means, more than ever, we need to work together at the global and regional levels to find solutions, however gradual in implementation, that will bring about a workable reform of the global reserve system," Kuroda said in a conference in Tokyo.

Kuroda's comments follow growing discussions among policymakers and academics that the world should no longer rely on one single, dominant currency, such as the dollar, as it has done since the end of the gold standard.

Using just one nation's currency for international reserves creates tension between national and global monetary policy making, said Kuroda, a former Japanese vice finance minister for international affairs.

Speaking at the same conference, Nobel Prize-winning economist Joseph Stiglitz also called for a new global reserve system, saying the least ambitious option could be a system based on the Special Drawing Rights (SDR), the International Monetary Fund's in-house unit of account.

But Kuroda said the key challenge to this proposal would be how to make this super-sovereign currency commercially viable. To make SDRs work on a global scale, a huge amount of SDR-denominated bank deposits and bond markets would be needed.

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