Dollar will remain primary reserve currency, Fed official tells bankers

Fed's Fisher Says Dollar
Likely to Stay Main Currency

By Christopher Anstey
Bloomberg News Service
Friday, November 17, 2006

http://quote.bloomberg.com/apps/news?pid=20601087&sid=aNFLnbUh1BSU

WASHINGTON -- Federal Reserve Bank of Dallas President Richard Fisher said the dollar is likely to remain the world's top currency in central bank reserves because of U.S. growth rates and success in containing inflation.

"It would be very difficult to replace the dollar as the central holding of central banks," Fisher said at a banking conference on the euro in Frankfurt.

The key attributes of a reserve currency are maintaining value by countering inflation, use as a unit of exchange, and the size of the economy, Fisher said. By those measures, the dollar is likely to stay attractive, he said. At the same time, increased use of the euro isn't a bad thing and doesn't imply central banks will sell dollars to buy euros, he said.

The share of currency reserves held in dollars was 65.4 percent at the end of June, compared with 71 percent at the end of 2000, according to figures compiled by the International Monetary Fund.

"Usually it takes a large shock" to displace the world's main currency, he said, citing historical examples of the pound and Dutch guilder. "I doubt" any such shock will occur to the dollar, he said. "I'm not aware of any."

United Arab Emirates Central Bank Governor Sultan Bin Nasser al-Suwaidi, who last month said he planned to increase his country's reserves of euro, said the dollar would be eclipsed by the European single currency within the next decade.

"The euro will definitely grow to dominate trade outside the euro area," he told the conference. "I expect the euro to become the currency of international trade within 10 years. It will surpass the dollar by 2015."

In an interview, Al-Suwaidi said his central bank has yet to start increasing its holdings of euro. The U.A.E. said in June that it held about $24.5 billion of foreign reserves, of which 98 percent were in dollars.

Speaking at the same event, European Central Bank Vice President Lucas Papademos said that while the euro "has begun to become a vehicle currency in international trade," the "global use of the euro is a market-driven process."

"We have a neutral view," he said. "The ECB neither promotes nor hinders use of euro in international finances."

Fisher said the Fed "should not be questioned in any way, shape or form in terms of its firm determination not to allow inflation to creep into our society."

Fed policy makers have raised their benchmark interest rate 17 times since June 2004 to contain inflation. They left the rate at 5.25 percent in the past three policy meetings, counting on a slowdown in growth to ease consumer price gains.

Asked whether the trigger for inflation concern at the Fed is 3 percent compared with a 2 percent rate for the European Central Bank, he said, "We have no tolerance for continued inflation above 2 percent."

Consumer prices rose 2.4 percent in the year to September, according to the Fed's preferred gauge, which excludes food and energy. The core personal consumption expenditures price index has been at or above the upper end of Fed Chairman Ben S. Bernanke's "comfort" range of 1 percent to 2 percent since April 2004.

The share of global foreign-exchange reserves held in euros rose to a record of 25.4 percent from 18.1 percent in the first quarter of 1999, when the single European currency was introduced, IMF data show.

"I don't think it's unhealthy for the euro to have increasing acceptance in the case of central bank reserves," Fisher said. "It does not mean necessarily that one sells dollars to buy euros," he said. As reserves increase worldwide, it's possible to boost reserves of both currencies, he said.

Central banks worldwide had $4.6 trillion of reserves at the end of June, up from $1.6 trillion a decade ago, IMF data show.

Fisher said the buildup of reserves isn't likely to precipitate a financial crisis, in response to a question at the conference.

An element of attraction for reserve managers is economic growth rates, he said. In that regard, "prospects for growth in the United States are greater" than the consensus outlook for Europe, he said.

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