PBoC Repeats Call for Super-Sovereign Currency, Putting More Downward Pressure on USD

China is emphasizing again its long-term goal of cutting the share of USD assets in its foreign exchange reserve, and wants to participate in creating an international reserve currency out of US control, reinforcing investor’s mid-term depreciation expectations for USD. Increasing risk preference of the market will also have a negative influence on USD in the short term.
 
"To avoid the internal weakness of a sovereign currency as reserve currency, we need to create an international reserve currency, which is unpegged to sovereign states and can remain stable long-term. To fully exert the influence its SDR, the IMF should retain part of reserve currencies of its member countries," declared the People’s Bank of China (PBoC) in a report released last Friday about China’s financial stability.

Last week, the PBoC report along with other factors drove down the dollar exchange rate to other major currencies, and it seems that China's proposal to build a new reserve currency system is reshaping the expectation of the currency traders. Led by China’s appeal for the establishment of a super-sovereign reserve currency, and the market’s increasing interest in risk, USD dropped against all major currencies last Friday. The euro/dollar rate closed at 1.4056, up 0.9%, the highest weekly increase in the month. The dollar/yen rate dropped 1.1% last week to close at 96.27. USDX, measuring the trend of USD comprehensively, dropped by 1.2% to 79.878.

Last week, to avoid the influence of USD depreciation on its exports, Japan, with its huge USD reserve, emphasized that Japan had "unswerving" faith in a strong USD.

Doubts on the international status of USD are common in emerging markets. Russian President Dmitry Medvedev suggested publicly on June 5 that a new reserve currency should be used to cut the dependence on USD, though Russia’s Treasurer said on June 13 in Italy that BRIC’s (Brazil, Russia, India, China) export markets were still dependent on USD, and that it was too early to talk about "replacing" USD.

Benedikt　Germanier, USB’s foreign exchange strategist, said USD’s status as international reserve currency was being questioned, giving investors more reasons to sell it. 

In London, shorting USD became the main theme last week. David　Woo, an analyst with Barclays Capital, said China’s call for international reserve currency reform was no surprise, but no other currency can now take the place of USD as international reserve currency. Woo’s take on the mid-term dollar trend is pessimistic. Barclays Capital recently lowered its expectation for USD in the coming 12 months, and estimates euro/dollar rate will rise to 1.5/1.

JP Morgan Chase analyst John Normand predicts a USD decline against other major currencies, mainly because the earnings of some American enterprises have exceeded early expectation and therefore boosted stock markets and pushed investors to continue buying overseas assets with high rates of return.

Normand said many economic statistics had exceeded expectations, and earnings levels of American enterprises were increasing, which will led to investors�increasing preference for risk and boost global stock markets and currencies with high rates of return. These factors are all negative to USD rates. "Without central banks�bailout policies, enterprises�earning would be a focus of the market. The USD rate against other major currencies will maintain its current level for the next three weeks, and began to decline after good news for earnings of many non-financial companies is released," said Normand in a report.