Loose lips sink dollar prices, Mr. Geithner

Treasury Secretary Tim Geithner, who really should know better, gets his first lesson in international currency markets.

But, behind the learning curve are some serious issues:

Yet Chinese central bank governor Zhou Xiaochuan’s demarche is also a warning that reserve currency status carries special obligations. It means the U.S. isn't conducting monetary policy only for itself but for much of the world. And it means that when the U.S. falls for the temptation to debase its currency, it sends shocks through the entire global trading system. The dollar's sharp but needless gyrations during this decade are in our view one of the major causes of the housing and commodity asset bubbles that led to the financial panic and global recession.

If Mr. Geithner meant yesterday that he is "open" to broader monetary and exchange-rate cooperation, that could be a step forward. But instead of abdicating to IMF bureaucrats, this would mean working with the world's most important governments and central banks -- for starters, the Fed, ECB, and the Banks of England, Japan and China. The world could use monetary reform, but the goal should be to reduce currency fluctuations and enhance price stability and world trade. In the meantime, the dollar's special status is an asset worth preserving.

Indeed. And, while the Euro is a “young” currency, and the eurozone still has growing pains, nonetheless, it becomes more attractive as a second, supplemental reserve currency all the time.

More on Zhou’s reserve currency proposal is, here. Note also the graphic showing the sharp rise in euro holdings, in the graphic.

That said, Zhou’s not proposing the Euro as a backup reserve currency, unlike what Russia has said in the recent past. He wants a “hypothetical” reserve currency instead.

China’s proposal is likely to have significant implications, said Eswar Prasad, a professor of trade policy at Cornell University and former IMF official. “Nobody believes that this is the perfect solution, but by putting this on the table the Chinese have redefined the debate,” he said. “It represents a very strong pushback by China on a number of fronts where they feel themselves being pushed around by the advanced countries,” such as currency policy and funding for the IMF.

The WSJ kind of pooh-poohs that idea in the first-linked story. But, given the way currencies float anyway, is it that unrealistic?

That said, right now, due to U.S.-China trade, it may not bee too practical for it to strongly ramp up the number of euros it has in reserve.