Roubini: Emerging Markets Will End Dollar's Reign

Roubini: Emerging Markets Will End Dollar's Reign

By: Reuters 16 Jun 2009 02:38 PM ET

The influence of emerging markets in the world economy will continue to expand and ultimately contribute to ending the dollar's reign as global reserve currency, economist Nouriel Roubini said on Tuesday.

Roubini, who predicted the current financial crisis, said at a Reuters Investment Outlook Summit in New York "the rise of emerging markets is a fundamental change" and predicted China's economy will eventually grow larger than that of the United States'.

China and other heavyweight emerging economies such as Russia and Brazil are now among the top U.S. creditors, and as they grow stronger will gradually lose appetite for financing rising U.S. budget and current account deficits, he said.

"Over time, the willingness of the U.S. creditors to finance (U.S. spending) and buy dollar reserves is going to be reduced," Roubini said. "People are getting nervous rightly about us devaluing or inflating our way out of the debt problem and causing real losses on the holdings of those assets."

The process of moving away from the dollar, however, will take many years, said Roubini, who is chairman of New York-based research firm RGE Monitor.

"Declines of major reserve currencies do not occur overnight. It's a slow process that takes decades," he said, noting the gradual shift in the 20th century from sterling to the dollar. "This century could be the Asian or Chinese century, but that will occur over time."

For now, he said China and others with large dollar holdings have no choice but to keep accumulating dollar assets.

Otherwise, they would face upward pressure on their currencies and an accelerated decline in exports.

Emerging market heavyweights Brazil, Russia, India and China, also known as the BRICS, who were meeting in Russia on Tuesday called for a "diversified, stable and predictable currency system."

Though they did not explicitly mention the U.S. dollar or an alternative supranational reserve currency, Chinese and Russian officials in recent months have questioned the dollar's ability to remain the world's currency of choice.

Roubini said some emerging markets are in better shape than others, however, citing Mexico, Poland and Colombia as examples of countries well-placed to weather the financial crisis.

That is less the case in Eastern Europe, where the International Monetary Fund has initiated aid programs for Hungary, Ukraine, Romania and Latvia.

Latvia's economy may contract by up to 20 percent in 2009.

The government has resisted pressure to devalue its currency because of the Baltic country's high foreign currency debt burden and Swedish banks' exposure to its economy.

But Roubini said efforts to maintain the lat's peg to the euro are doomed.

"Devaluation in Latvia is unavoidable at this point. If you don't do it, the economic contraction, depression, debt deflation will only get worse," he said.

To prevent the currency from plunging uncontrollably, he said the European Central Bank might consider "euroization," though he conceded this could be a tough sell in Frankfurt.

Copyright 2009 Reuters.