ADB official: appropriate to look at currency basket

Monday, 15 November 2010 22:02 - - {{hitsCtrl.values.hits}}

NEW DELHI (Reuters) - The world should examine whether using a basket of currencies is more appropriate than the current system with the U.S. dollar as the single reserve currency, a top Asian Development Bank official said on Monday.

“The economic centre of gravity is shifting and it is shifting to Asia. So we have to think whether in that context, a single currency serving as a reserve currency is appropriate,” said Rajat Nag, managing director general of the ADB.

Nag did not say which currencies might be in a proposed basket but World Bank President Robert Zoellick has suggested a cooperative monetary system including the dollar, the euro, the yen, the pound sterling and the yuan.

Zoellick had also suggested using gold as an indicator to help set foreign exchange rates. [ID:nSGE6A70A7] Nag refused to comment on the World Bank’s head proposal, but said policymakers need to look at their options.

“The time has come for us to be creative and think of issues without getting dogmatic,” he said.

The U.S. Federal Reserve Bank’s second round of quantitative easing has put Washington at odds with Beijing and Moscow as these countries view the Fed’s latest move to kickstart the U.S. economy as a means to weaken the dollar.

The United States has cajoled China to allow its yuan currency to rise faster, and accuses it of keeping it undervalued to gain a trade advantage.

“Exchange rates need to be market-determined and the flexibility in the exchange rate is desirable for the good of all. We have given the same message to China,” Nag said.

Foreign exchange rates are central to the current account imbalances debate, with the United States initially advocating the need for numerical targets as a tool to iron out rifts between export-rich countries and debt-laden consumer nations.

“But it would be difficult to take one number and say this is what it should be,” Nag said. “It is quite appropriate to think in terms of a set of indicators. The G20 has taken the right view.”

The G20 at a meeting in Seoul last week agreed to draw up a set of “indicative guidelines” to measure large current account imbalances, which was a defeat for Washington’s push for numerical targets. [ID:nN11196971]

Nag said emerging economies need to be careful of hot money flows into the region in the aftermath of Fed’s decision to buy $600 billion in government securities by June.

Fears of excessive capital inflows have forced some central banks in Asia to leave their interest rates steady even when they are battling inflation, while some are looking to impose capital controls.

The G20 last week also gave in to the demands of developing countries like Brazil to use selective capital controls to prevent incoming waves of cash from pushing up already overvalued exchange rates.