Policymakers see dollar losing reserve currency allure

DAVOS, Switzerland Mon Jan 31, 2011 2:22pm GMT

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011.

Credit: Reuters/Kacper Pempel

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DAVOS, Switzerland (Reuters) - The U.S. dollar's role as a reserve currency will diminish in the coming years as Asian economies like China grow and countries seek to diversify their monetary holdings, policymakers said on Friday.

The U.S. Federal Reserve's policy of quantitative easing -- essentially printing money -- and a call by France to look at ways to wean the world off the dollar as the sole reserve money have put the U.S. currency in the spotlight.

"I'm more optimistic about the euro gaining strength as a potential reserve currency," Bank of Israel Governor Stanley Fischer said during a panel discussion at the annual World Economic Forum in Davos, Switzerland.

"We ourselves are diversifying into currencies which we would never have put in the reserves before, including the Australian dollar and so forth," he added. "I think people will diversify their reserves."

French President Nicolas Sarkozy is trying to rally the Group of 20 powers to the idea of a more varied monetary system after decades of the dollar being the world's reserve currency and a major unit of international trade settlement.

The dollar debate comes at a time when many countries are tempted to let their currency drop to promote exports and growth after the worst downturn since World War Two, even if that can be at each others' expense.

Bank of Canada Governor Mark Carney and Fischer anticipated that, in the long run, Asian monies would have a greater role as reserve currencies.

"I agree with Stan (Fischer) that over time there will be more of a multi-polar system. Other currencies will play a central role in reserves," he said. "The (Chinese) renminbi, over time, should have a role as a reserve currency."

Turkish Finance Minister Mehmet Simsek saw the United States' quantitative easing policy leading to a diversification of reserve holdings.

"If the U.S. continues the way it is ... certainly countries will look for alternatives because you can't print so much money and expect no consequences," he said.

"Ultimately the centre of gravity is shifting towards the East," Simsek added. "Certainly, 10 years from now there could be a very different landscape."

(Reporting by Paul Carrel; editing by Mark Heinrich)

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