China raised the stakes in its long-haul drive to unseat the dollar as
the world's dominant currency, seeking a debate on an alternative
reserve regime at next week's Group of Eight summit.

In what may be seen as a watershed moment, Chinese officials, who have
unofficially raised the issue recently, have now asked for it to be
brought to the diplomatic table.

The request means that the Chinese proposals to introduce the IMF’s
standard drawing rights as a possible replacement for the dollar could
form part of the concluding communiqué.

China, which holds more U.S. Treasury debt than other country has been
particularly vocal, proposing to replace the dollar with the
International Monetary Fund's Special Drawing Rights (SDRs) based on a
basket of currencies as a super-sovereign currency.

_________________________________

Outlook For the U.S. Dollar Darkens

By Adam Smith
TIME ?2 hours ago?

Heading abroad from the U.S. this summer? Consider packing a few extra
dollars. Since early March, the greenback has fallen 11% against the
euro and 17% against Britain's pound, as investors who had sought out
the dollar as a safe haven during the worst of the crisis now head for
riskier assets. Throw in concerns over the U.S.'s spiraling deficit and
calls from China for an alternative reserve currency, and "the
likelihood is the dollar's going to remain under pressure," says Simon
Derrick, head of currency research at Bank of New York Mellon in London.
"You're going to see it continue to slide." (Read "Is the Almighty
Dollar Doomed?")

That's a reversal from the recent uptick. Traditionally a safe bet amid
economic mayhem, the dollar climbed about 25% against the euro in the
eight months to March this year; the unattractiveness of rival
currencies only made it more appealing. But, says, Derrick, "that drive
seems to be shifting substantially." Sure, a hint of bleak economic data
can still goose the greenback — the prospect of poor U.S. payroll
figures for June, set for release Thursday, has helped boost the
currency in recent days — but optimism in other assets is on the rise.
Global equity markets, in particular those in emerging market countries,
have performed well in recent months. China's Shanghai composite index,
for instance, has shot up 63% so far this year.

Also weighing on the dollar: investor concerns that to balance a budget
deficit expected to swell this fiscal year to $1.85 trillion — equal to
13% of the country's GDP, a level not seen since World War II — the
Federal Reserve could simply resort to printing more money, further
flooding the markets with dollars. While the central bank said June 24
it had no plans to expand its purchase of government or mortgage bonds
beyond the $1.2 trillion earmarked for the purpose in March, not
everyone is convinced. "There is always the nagging concern that if this
is just a dead cat bounce in the equity markets and we have a further
rocky ride in the second half of this year," says Derrick, "then a
second round of fiscal spending programs may have to be introduced."
(Read "Is the Euro the New Dollar?")

Bottom line: the dollar faces a longer-term challenge, and the big
players know it. Echoing a call made by Zhou Xiaochuan, its governor, in
March, China's central bank advocated a new global reserve currency in
its annual financial stability report released last Friday. Raising
concerns of a move away from the dollar as the world's reserve, the
proposal for a "super-sovereign" coin nudged down the greenback versus a
host of major currencies. That may have been a tad more impact that Zhou
was seeking: With something like two-thirds of its roughly $2 trillion
of foreign currency reserves held in dollars, the lower a buck goes, the
less China's vast pot of cash is worth.

In reality, with 64% of the world's reserves held in dollars at the end
of last year — way more than in any other money — a move to a new
reserve currency would be both time consuming and complicated. And with
China holding so many dollars, selling even a small amount of its
reserves would dent the value of those that remained. But despite the
glitches, argument over the need for a new international reserve does
little to lift sentiment in the dollar's favor. Its replacement might be
"an implausible suggestion", analysts at HSBC wrote in a May note to
clients, but "its preeminent position as the reserves currency of the
world does not mean that [the dollar] will maintain its value." Like
Derrick, HSBC is counting on a further fall in the months ahead. Better
not leave that holiday too late.

http://www.time.com/time/business/article/0,8599,1908071,00.html