Geithner: Dollar is 'dominant reserve currency'

NEW YORK

The dollar mostly recovered from its plunge early Wednesday as Treasury Secretary Timothy Geithner said in remarks before the Council on Foreign Relations the greenback will remain the world's "dominant reserve currency" for a long time.

Brian Dolan, a currency strategist at Forex.com, attributed the dollar's collapse earlier to Geithner saying the U.S. was "quite open" to an increase in the use of the IMF's "Special Drawing Rights" -- a basket of currencies made up of the euro, yen, pound and dollar that has served as a reserve asset since 1969 -- in response to a question about a recent essay by Zhou Xiaochuan, the head of China's central bank.

Zhou, in his article, recommended creating an expanded reserve currency made up of a basket of major currencies and controlled by the International Monetary Fund.

Geithner's "off-the-cuff, impromptu remark touched a nerve in the market," Dolan said. "The dollar is under suspicion due to a potential devaluation effect" from the floods of money the U.S. government is injecting into the system to help unfreeze credit markets. "Any comment of the treasury secretary distancing itself from (the dollar as) reserve status is a major blow."

Geithner later said he had interpreted Zhou's article to be a call for an expanded currency substitute used by the International Monetary Fund, according to a transcript on the Council on Foreign Relation's Web site.

Dolan said Geithner meant that world currency reserves -- which are now composed primarily of dollars, euros and some amounts of other major currencies -- should more accurately reflect the emergence of other major global players, and that countries should also one day hold stocks of Indian, Chinese and Russian currencies, for example.

The dollar mostly returned to its levels before the plunge after Geithner said "the dollar remains the dominant reserve currency and is likely to remain that for a long period of time."

President Barack Obama said Tuesday night during a press conference that China's call for a new global reserve currency was unnecessary. Earlier in the day, Geithner himself and Federal Reserve Chairman Ben Bernanke had both said they rejected the idea of a new global currency during a congressional hearing.

The 16-nation euro traded at $1.3548 in New York midday trading from $1.3518 late Tuesday, after previously bouncing as high as $1.3651 on Geithner's statements.

The dollar also sank to 96.89 Japanese yen before recovering to 97.72 yen. Late Tuesday, the dollar bought 97.89 yen.