China Backs Off On Replacing the Dollar as the Global Reserve Currency

One of the more interesting developments during the month of March was the call, made by the Chinese, for a replacement of the dollar as the global reserve currency. China had called for special drawing rights on the International Monetary Fund as the new reserve currency. Additionally, China has been entering into bilateral agreements with a number of emerging markets to increase the use of the yuan as a reserve currency. Not only that, but China has been diversifying its holdings to include more European investments and energy investments.

China cites concerns with regard to its U.S. bond holdings. With a skyrocketing U.S. deficit, quantitative easing by the Fed, and loose monetary policy, it is little surprise that China is concerned that inflation is on the way -- and that this inflation is ready to erode the value of China's U.S. investments.

However, after some talks with Secretary Treasury Timothy Geithner, Chinese officials have agreed not to try to replace the U.S. dollar as the global reserve currency -- at least for now. China appears to be interested in a recovering U.S. economy, and, in any case, even with China's best efforts, it could be at least a decade or two before it is strong enough to overcome the U.S. dollar and replace it as a global reserve currency.