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WRAPUP 1-Russia, China right to diversify fx reserves-officials

Published 09/11/2009, 09:16 AM
Updated 09/11/2009, 09:18 AM

* U.S. official says makes sense for China to diversify

* Russia says would like to add more reserve currencies

* U.S. trade deficit concerns resurface

By Toni Vorobyova

MOSCOW, Sept 11 (Reuters) - There were fresh signs on Friday that both Russia and China will slowly take steps to weaken the dollar's role in their currency reserves, adding to pressure on a U.S. unit battered by a changing global economic balance.

Russia -- which has already cut the dollar's share in its reserves to under 50 percent -- would like to include another two or three currencies in its investments, central bank First Deputy Chairman Alexei Ulyukayev told Reuters. [ID:nMOS005528]

The U.S. Treasury's economic and financial emissary to China said it made sense for China to diversify its huge stockpile of foreign exchange reserves, which reached the equivalent of $2.13 trillion at the end of June. [ID:nPEK61981]

"The general issue is that China has a huge amount of reserves and it makes some sense to diversify what you put these reserves (into)," David Dollar told a meeting of the World Economic Forum in the northeast Chinese city of Dalian.

"It's healthy to have a wide and different type of reserve currencies."

Worries over dollar sales by two of the world's top three reserve holders have surfaced several times in recent months, hurting the dollar, which now trades around a 1-year low against a basket of six major currencies <.DXY>.

The deepening of the financial crisis last year, and the broad economic downturn that followed, benefitted the dollar as risk-wary investors rushed to store cash in the relatively safe haven of U.S. government bonds.

But with nascent signs that the worst of the global slump is over, investors have grown more hungry for emerging currencies and other riskier assets, and talk of a broader move away from the dollar has resurfaced.

Equity investors shifted funds into Europe, China and Japan in the latest week, continuing a trend of shifting to riskier, high-yielding assets, EPFR data showed. [ID:nHKG11003]

U.N. BACKED

The comments follow a call from United Nations economists earlier this week for the creation of a new world reserve system using several currencies, and not just the dollar.[ID:nL7696421]

China has made clear to other world leaders that it wants a better, more stable global reserve currency system, but analysts say Beijing is in no rush to dethrone the dollar because it has vast dollar-denominated assets.

The issue has been aired at meetings of the G8 industrial powers this year, but there has been no mention of it in official summit statements and leaders say there has as yet been no real discussion.

But with the economic case against the greenback -- and for faster-growing economies like China and Asia in general -- growing, markets are growing steadily more suspicious that the currency's long-term status is under threat.

"There's discussion about diversification, Fed credibility, and the re-emergence of the U.S. current account deficit," Michael Klawitter, senior strategist at Commerzbank in Frankfurt, said on Friday.

"All these factors weigh on dollar sentiment."

Signs of an improvement in U.S. growth in recent days have also failed to lift the dollar. A surge in imports led to news on Thursday of a record trade deficit in July [ID:nN10386688], re-awakening concerns about the country's economic imbalances. (Reporting by Yelena Fabrichnaya and Lidia Kelly in Moscow, Jamie McGeever in London, Eadie Chen and Jason Subler in Dalian, China; Writing by Toni Vorobyova, editing by Dmitry Sergeyev and Patrick Graham)

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