Geithner's remarks about currency send dollar on wild ride

WASHINGTON - Treasury Secretary Timothy Geithner sent the dollar tumbling with comments about China's ideas for overhauling the global monetary system, only to drive it up by affirming that it should remain the world's reserve currency.

Geithner was asked at a Council on Foreign Relations event in New York about People's Bank of China Governor Zhou Xiaochuan's call for a new international reserve currency. He said while he had not read Zhou's proposal, he understood it as a plan "designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that."

The dollar slid as much as 1.3 percent against the euro within 10 minutes of news accounts of Geithner's remarks. It recouped much of the loss about 15 minutes later, when Geithner then predicted no change in the US currency's role. The dollar was down 0.9 percent at $1.3591 per euro as of 3:39 p.m. in New York.

Yesterday's episode highlighted investors' sensitivity to any weakening role for the dollar as power shifts toward a wider group of developed and emerging nations, said James McCormick, Citigroup's global head of foreign exchange and local markets strategy. It was "important" that China's proposal came in the run-up to a Group of 20 summit next week, he added.

"The G-20 is gaining relative power versus the G-7 and we will feel that and see that for some time to come," McCormick said. One key focus for markets will be any change in sentiment toward the dollar, which makes up about two-thirds of world central banks' foreign-exchange reserves, he said.

Geithner will attend the summit of the G-20, which groups the largest developing and emerging countries, April 2 in London along with President Obama. The smaller Group of Seven has been the main forum for leaders of nations with the biggest economies.

After the dollar slumped in the aftermath of Geithner's first remarks, Roger Altman, who worked with Geithner as deputy Treasury secretary in the Clinton administration, asked him to clarify his comments.

"I'd like to ask one final question, in effect on behalf of the market," said Altman, founder of Evercore Partners Inc. "Let me ask the question this way. Do you see any change over the foreseeable future in the basic role of the dollar as the world's key reserve currency?"

Geithner responded: "I think the dollar remains the world's dominant reserve currency."

In his earlier answer, Geithner said increased use of SDRs should be "rather evolutionary, building on the current architecture, rather than moving us to global monetary union." The IMF holds members' reserves in SDRs.

Geithner's remarks don't indicate Geithner favors moving to a system with the SDR as a reserve currency, strategist Lee Hardman at Bank of Tokyo-Mitsubishi Ltd. wrote in a note.

"That was the big concern amongst the confusion," Hardman said. "A move to an SDR-linked system away from the dollar would naturally lead to a reduction in the dollar's share of global reserves."