News wires report that China has announced it wants to talk about reform of the international monetary order at next week's G8 meeting in Italy. The dollar has been hit in a knee-jerk reaction to the news headlines, but we are skeptical of the merits.
First, China is not a member of G8 and is hardly in a position to determine the agenda. Second, China's views are well known since the April G20 meeting. Third, what ever reform takes place, it is a multiyear process. Fourth, we are struck by the gap between China's declaratory policy--what they say--and their operational policy--what they do. What they say sounds like they want to end the dollar's role as the numeraire. What they do is accumulate dollars and Treasuries, with some officials acknowledging they have no choice. Fifth, any changes in the international monetary order requires US approval. It cannot be foisted on the US. Sixth, the G8 is not the key forum for this kind of discussion. The IMF is. Moreover, central bankers do not attend G8 meetings and that alone may limit such discussions.
The dollar was under pressure yesterday and we expect additional near-term dollar weakness. However, the China story appears to be an excuse to do what many were inclined to do in the first place.