By Mary Angela Rowe and Nick Olivari
NEW YORK, June 11 (Reuters) - Nations like Russia have rattled global markets by challenging the domination of the U.S. dollar as the world's reserve currency, but investors say there is no realistic alternative for now.
Russia will renew its push for a rethink on the dollar's status as the reserve currency of choice when it hosts a summit of fellow emerging heavyweights Brazil, India and China next week.
The greenback is too integrated into global financial markets, with almost all commodity trade conducted in dollars and the United States still retaining the deepest, most liquid markets in fixed income securities, key assets for central banks.
Currently the dollar represents about 65 percent of foreign exchange reserves. While the dollar could fall to 50 percent of foreign exchange reserves in five years and even to 40 percent of total reserves 10 years from now, it is likely to stabilize at that level, said Michael Woolfolk, a senior currency strategist at The Bank of New York-Mellon.
While the dollar and U.S. government bond prices briefly fell on Wednesday when Russia's central bank said it would cut the amount of currency reserves held in U.S. Treasuries and buy bonds issued by the International Monetary Fund, foreign exchange investors were mostly unfazed. [ID:nN10528410].
They viewed the talk as Russian rhetoric to show they still have some of the global clout of the former Soviet Union.
"This discussion of reserve currencies is in part the testing of a new president in the White House as many bilateral treaties, including arms negotiations and trade negotiations, are on the table," said Woolfolk.
"Power politics is the name of the game."
Russia holds about 30 percent of its $404.2 billion foreign exchange reserves in Treasuries, making it the fifth-largest holder of U.S. government debt. [ID:nLA1052951].
China, the world's largest holder of U.S. Treasuries, has $767.9 billion, according to the most recent U.S. Treasury Department data, while Japan has $686.7 billion.
The IMF welcomed commitments from Russia to buy $10 billion of new IMF bonds, and from China, which has made increasingly critical comments about the dollar and the security of investing in U.S. debt, to purchase up to $50 billion of new debt. [ID:nN10528410].
But there is almost no danger of the U.S. dollar being displaced as the world's first-choice reserve currency, analysts said, even with Brazilian President Luiz Inacio Lula da Silva also telling Reuters on Wednesday that Brazil also has decided to contribute $10 billion to the IMF as part of a broader push to reform the multilateral lender. [ID:nN10452585].
"What many doom-sayers fail to recognize every two or three years, when the dollar's status is questioned, is that the dollar is involved in over 90 percent of all foreign exchange transactions in the world in a market that has turnover of US$3.5 trillion a day," said Woolfolk.
"Even within our own free trade zone (the North American Free Trade Agreement), you cannot move money from Canada to Mexico without involving the U.S. dollar."
While a projected $1.8 trillion U.S. budget deficit and the prospect of higher inflation have pushed U.S. yields higher in recent months and indicate there is increased risk in holding dollars, at the moment Russia appears to be alone in its view that other reserve currencies are needed.
Only last week, officials at Asia's richest central banks said they would shrug off a U.S. sovereign credit rating downgrade -- a topic of speculation recently in markets -- and continue to buy Treasuries to keep markets stable.
Those bank officials and others with direct knowledge of policymaking said a ratings cut would not cause China, Japan, India and South Korea to change their reserve policies, at least in part because there are no alternatives to the liquidity afforded by the dollar. [ID:nSP412010].
Looking further out, foreign exchange analysts do see the potential for the U.S. dollar's dominance of global trade and currency reserves to weaken, though not to end.
"The evolution of a reserve currency would be exactly that, an evolution, not an overnight change," said Joseph Trevisani, chief market strategist at FX Solutions in Saddle River, New Jersey.
There must also be a viable alternative and for now the only one is the euro, said Trevisani, but even the single zone currency is not so realistic given it is still relatively new and its use is not yet so widespread. And while there is some talk of euro-denominated oil, few are taking it seriously.
Analysts also discount the use of the Chinese yuan, which will not be a real alternative for a decade or more, said David Watt, senior currency strategist at RBC Capital Markets in Toronto, and even then it may only be useful as a trade unit.
"China is very closed on the capital accounts basis, and they still have much more control over the yuan than would be needed to allow it to become a global reserve currency," Watt said.
The yuan is tightly controlled by the Chinese central bank and only allowed to trade in a narrow band on any given day. There are also no international assets denominated in yuan.
Transparency, tradable financial assets such as bonds in a given currency and the currency itself freely exchanged are key factors for a reserve currency -- attributes only the dollar possesses for now. (Reporting by Mary Angela Rowe and Nick Olivari; Editing by Kenneth Barry)