Valencia: A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6 trillion reserves pile, says Nobel Prize-winning economist Robert Mundell.
Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of Second World War until the 1970s.
"There's no doubt about it that inside the Chinese government there's a lot of discussion going on. I'm not sure how they're doing it but I know they're going to get an input from me," Mundell told Reuters in an interview.
Without reform, the global monetary system is headed for a dollar crisis within years, Mundell believes. However, he thinks the United States will avoid a technical recession during the current downturn and that the weak dollar will help it to make a recovery around autumn of this year.
But its growing liabilities accumulated by its current account deficit means that it will eventually pay a high price if the current monetary set-up continues, he said. "I see the problem coming maybe in the next recession," he said. "There could be a real dollar crisis in five years."
China is worried about its pile of about $1.6 trillion in foreign reserves, built up during years of US trade deficits, which loses value as the greenback depreciates.
"What you need to have is an International Monetary Fund that's going to take some of these excess dollars, put them into a substitution account inside the IMF or some other institution and then use that and create what is a new international currency," said Mundell. "This kind of proposal would be very acceptable inside China. The Chinese are thinking in terms of this," he said.
Mundell, awarded the Nobel Prize for Economics in 1999 for his work on exchange rates and optimum currency areas, travels regularly to China, where he has advised senior government officials.
For years, China has come under pressure from US and European authorities to allow its currency, the yuan, to appreciate, in order to make Western goods more competitive. But Beijing has resisted.
"They don't have many pre-conceptions. They don't have a belief obviously that floating is a good idea, whereas the European Central Bank and the Americans think that floating is the best of all possible worlds," Mundell said.
Fixing exchange rates would favour the euro zone, which is now battling with a euro at around record highs against the dollar, said Mundell, who has often been referred to as one of the intellectual fathers of the single European currency.
Gold will reach $1,200 and oil will top $175 - within 30 to 90 days -- Gold Falls From One-Week High as Dollar Rebounds, Oil Declines -
By Millie Munshi and Halia Pavliva
June 9 (Bloomberg) -- Gold fell from a one-week high as the dollar rebounded and energy costs dropped from a record, eroding demand for the metal as a hedge against inflation. Silver also declined.
The dollar rose against the euro for the first time in three sessions as U.S. policy makers indicated they are concerned about the currency's 7 percent drop this year. Crude oil fell more than $2 a barrel as Saudi Arabia called for a meeting of producing and consuming nations to discuss how to deal with soaring prices.
``The gold weakness is due to the stronger dollar and falling oil,' said Matthew Zeman, a trader at LaSalle Futures Group in Chicago. `Gold's fortunes will be determined by the outlook for inflation this week.'
Gold futures for August delivery fell 90 cents, or 0.1 percent, to $898.10 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price reached $912.50, the highest for a most-active contract since May 28. The metal has gained 38 percent in the past year, reaching a record $1,033.90 on March 17.
Silver futures for July delivery fell 22 cents, or 1.3 percent, to $17.21 an ounce. The metal has climbed 32 percent in the past 12 months.
The euro fell as much as 1 percent, and crude oil dropped as much as 2.5 percent after soaring to a record $139.12 a barrel on June 6.
Gold climbed earlier on concern tensions between Iran and Israel will escalate, enhancing the appeal of the metal as an investment haven.
Israel, Iran
Israel may attack Iran if the country doesn't abandon its nuclear-development program, Shaul Mofaz, Israel's transportation minister and a contender for the post of prime minister, told the Yediot Ahronot daily last week. Some investors buy gold during times of political unrest to hedge against turmoil in financial markets.
``With there being more talk of war between Israel and Iran, it increases the uncertainty in the geopolitical situation and adds to safe-haven buying in gold,' Zeman said.
The metal will rise as a ``barometer for geopolitical activity,' said Ralph Preston, an analyst at Heritage West Futures Inc. in San Diego. Gold will reach $1,200 and oil will top $175 ``within 30 to 90 days stemming from an international event, whether it would be a coup in Pakistan' or unrest in the Middle East, he said.
On June 6, gold jumped 2.7 percent, the most since late November, as oil soared more than $10 a barrel. The metal has more than tripled since the end of 2001, and oil has surged more than sixfold after the U.S. invaded Iraq and violence increased in the Middle East.
`Risk Premium'
``The mega bull trend in gold and oil that was kicked off in 2001 reflects the growing risk premium associated with an ever-changing world order dependent upon natural resources,' Preston said.
In the past two months, oil has jumped 21 percent, while gold declined 4.2 percent.
``When you see what's happening in oil, you know that gold is going to have to move higher,' said Ron Goodis, a futures- trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Gold will add another $20 or $30 to the price very quickly because of where oil is.'
Gold's all-time inflation adjusted record is $2,284 on Jan. 21, 1980, according to a calculator on the Web site of the Federal Reserve Bank of Minneapolis. In 1980, when the U.S. inflation rate was running in the double digits and oil was climbing after a decade of Middle East instability, gold reached a peak of $873.
The price will average $935 an ounce this year, Standard Chartered analysts Helen Henton and Dan Smith said in a report last week. That compares with an average $701.68 an ounce last year.
Soaring oil prices are ``bringing inflation risks back into focus,' Standard Chartered said.
Gold has climbed 0.2 percent in the past five sessions.
To contact the reporters on this story: Millie Munshi in New York at mmunshi@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net. Last Updated: June 9, 2008 15:08 EDT
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