[AndrewWoo]

Yesterday, the UN's Conference on Trade and Development (UNCTAD) released its annual trade and development report, a significant part of which is dedicated to discussing the role of FX markets in perpetuating the financial crisis. In particular, the report discusses the problems associated with the dollar-based reserve system, or indeed any that uses one or several national currencies. With yet another organisation calling for a move away from the USD as a global reserve currency, the USD has come under pressure in early Europe trading.

The UNCTAD report however differs from previous discussions of international reserves, in that it proposes a system to tackle the problems underlying the need for reserve accumulation - "exchange rate instability and the possibility of currency attacks" - rather than recommending alternatives such as SDRs. Specifically, it calls for an internationally agreed exchange-rate system based on the principle of constant and sustainable real exchange rates of all countries, similar to multilateral frameworks such as Bretton Woods and the European Monetary System, arguing this would prevent destabilising capital flows at its source.

This radical suggestion at present seems far more remote than even the possibility of alternatives to the USD as the dominant reserve currency. By adding to the voices against the current reserve system, the report does add marginally to the downward pressure on the USD. But a rapid shift by reserve managers away from dollars remains unlikely - it would be self-defeating and raise concern in countries where currencies would appreciate markedly at a time when economic conditions are still very weak. The case for a new reserve system is strong but the alternatives remain unclear.