Citi's Steve Englander cuts to the chase:
So there is this meeting in Nanjing where all countries but one are trying to figure out how to get rid of the USD as the world's major reserve currency, one country is trying to keep it's currency as the world's major reserve currency but have it depreciate against all the others, and one country wants its currency to become a reserve currency but doesn't want anyone to buy it without permission. The intended outcome is reform of the international monetary system.
Here's the problem:
Finding alternatives to the USD as the major asset in reserve portfolios is easy -- proposed replacements include other currencies, SDR's. super-SDR's, gold, other commodities, SWF's etc. Finding someone to hold the unwanted USD's is not so easy and that is the nub of the problem. For example, assume the IMF created USD900bn worth of SDRs so that global reserve managers could drop the USD weight in their portfolios by 10 percentage points. Undoubtedly there would be plenty of central bank buyers of these SDRs and sellers of USD -- the question is who would want to hold the USD that the central banks would be selling? The IMF? The private sector? At the end of the day, the unwanted dollars have to go somewhere and the only way to find a 'somewhere' is to make the dollars a lot cheaper, which is the result N-1 countries wanted to avoid in the first place.
It isn’t even clear who will take the capital loss. Global reserve managers might imagine that they could accumulate these new reserve assets before anyone notices that they are dumping dollars in order to buy them. That does not seem likely. The IMF might be invited to be left holding the USD bag, but their enthusiasm is likely to be similarly limited. The private sector would see the public sector selling and would not take that as a buy signal. There might be a point at which US assets were so undervalued because that private investors took the other side but that level would have to be so low that the weight of probability will have shifted to USD appreciation and that could be a long way down.
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