Risk Professional - December 2009

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There is nothing new about cycles in foreign exchange markets, but the dollar’s recent moves, ZMAEMK\QVO;JZWILMZ;MKWVWUQK;KWV- cerns, have been accompanied by questions about its future as the premier international reserve cur- ZMVKa;; 4MILMZ[; WN ; :][[QI;; +PQVI; and oil-producing states, as well as a United Nations-sponsored committee of economists, have suggested, with varying degrees of insistence, a transition to a new reserve unit, perhaps the Special Drawing Rights (SDRs) that are the International Monetary Fund’s unit of account.

=;;;; WNÅKQIT[; PI^M; ZM[XWVLML; coolly. “Our commitment is to a strong dollar based on strong fun- LIUMV\IT[;º; ?PQ\M; 0W][M; MKW- VWUQK; IL^Q[MZ; 4I_ZMVKM; ;]U- mers said at a recent Bloomberg foreign exchange conference in New York, otherwise deferring to Treasury secretary Timothy Gei- \PVMZ;I[;\PM;WNÅKQIT;[XWSM[UIV;WV; currency policy.

Yet World Bank president Robert Zoellick acknowledged in a September speech at Johns Hopkins University that the euro and Chinese yuan will inevitably diminish the dollar’s dominance.

Columbia University economist and Nobel laureate Joseph Stiglitz, head of the U.N. expert XIVMT; WV; ÅVIVKQIT; ZMNWZU[;; PI[; cited a “consensus that there are problems with the dollar reserve [a[\MUº; IVL; [IQL; \PI\; I; +PQVM[M; proposal to migrate to SDRs could start to be phased in next year.

Stock Digest editor Jim Trippon adds that political sensitivities could complicate any necessary international agreements.

New Rules of the Road For those watching their risk XZWÅTM[;; IVa; KPIVOM; WZ; ^WTI\Q TQ\a; in the foreign exchange market naturally yields opportunity. But

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¹+PQVI; Q[; OM\\QVO; RQ\\MZa;º; WJ- serves Dev Kar, lead economist at Global Financial Integrity, an international policy think tank in Washington. “They are sitting on $2.1 trillion in reserves. When the dollar slides a little bit, they lose P]VLZML[; WN ;UQTTQ WV[; WN ;LW TTIZ[;º;

Investment adviser and China
in a changeover to SDR reserves,
investors and portfolio managers
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to.

“The borrowing ability of individual governments would be KWUXZWUQ[ML;º;_IZV[;2IKS;*T]U;; a Washington-based tax attorney and senior adviser at Tax Jus-

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\QKM; 6M\_WZS;; ¹); UIRWZ; XZWJTMU; _W]TL; JM; ÅVIVKQVO; OW^MZVUMV\; debt, and then the question becomes, who buys dollar debt as WXXW[ML; \W; ;,:; LMJ\'º; *T]U; believes that corporations and market players would have to buy in to an entirely new commercial framework that will “require the willingness and participation of

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But J.D. Foster, a senior fellow at Washington’s conservative-leaning Heritage Foundation, contends that the IMF can readily expand its SDR-monitoring role. As for secondary effects, “Banks would have to calculate required reserves against each currency, individually and collectively. It would mean one more exchange risk to worry about. For regulatory reform, it would mean accounting for another reserve

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5IZS;+ITIJZQI;;LQZMK\WZ;WN;Å- nancial regulation studies at the Cato Institute in Washington, says that SDRs as a world currency would simplify multinationals’ XZWÅ\;IVL;T W[[; ZMXWZ\QVO;; WVM; WN ; the successes of the euro zone. “But the value of any currency is the willingness of that coun- \Za;\W;[\IVL;JMPQVL;Q\;º;PM;VW\M[;; and Cato says that it will take a decade or longer for the yuan to exert enough strength to supplant the dollar.

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Consciousness about greenhouse gas (GHG) reductions, spurred in part by the international climate change conference in Copenhagen this month,

has corporations of every stripe accelerating preparations for self-assessments, regulatory compliance and participation in cap-and-trade markets (see the Oc-

tober Risk Professional). Amid the inevitable uncertainty, a broadening array of new and updated software offerings are ready to assist in carbon-related data col-

lection, planning, forecasting, re- XWZ\QVO; IVL; ZML]K\QWV; XZWRMK\[;; Companies as diverse as Coca-Cola, Tesco and Wal-Mart have begun using such tools.