Prime Minister Manmohan Singh has said that there is no substitute for the dollar as the global reserve currency.

His statement comes a few weeks after the Reserve Bank of India (RBI) bought 200 tonnes of gold from the International Monetary Fund in what many analysts believe is an attempt by the Indian central bank to cut its exposure to the American currency, which has been sliding against other major currencies in recent months. New data released by the US treasury shows that India reduced its holding of US government bonds between June and September: from $39.3 billion to $35.9 billion. RBI does not provide too many details about how it invests the country’s foreign exchange hoard, so we may have to wait a few more months to find out whether the gold purchase was financed by selling US treasury bonds on October and November.

Illustration: Jayachandran / Mint

The Prime Minister’s statement and RBI’s actions seem to be at odds with each other, but it is hard to say for sure till there is more clarity about what exactly the central bank is doing with its foreign exchange reserves. It is quite possible that RBI has cut its exposure to US government debt, but not US assets. In other words, it may have moved some money into other instruments such as certificates of deposit and agency debt, since yields on US treasury bills are now close to zero.

Equally importantly, Manmohan Singh’s vote of confidence in the dollar is at odds with what leaders of many other countries have been saying, not to mention the dollar selling by foreign exchange traders. For example, China has been playing an intricate cat and mouse game with the US: sometimes hinting that the dollar needs to be replaced with a new international currency and sometimes saying quite the opposite. The US treasury also reported that China has been a less enthusiastic buyer of US treasury bills than before. It has bought only $30 billion of them since April, barely one-fifth of what it bought in the previous six months.

The politics of the dollar is as important as the economics of the dollar. A weak economy, rock bottom interest rates and a trade deficit are pushing down the dollar as the return of risk appetite sends money into other assets such as gold, industrial commodities and emerging market equities. The politics is another matter: Dollar supremacy is inextricably linked to US supremacy.

In this context, China’s stern lectures to Barack Obama on the economic mess in the US and Manmohan Singh’s conciliatory remarks on the dollar and the US economy tell us a lot about the power equations between the world’s only superpower and Asia’s two rising powers.

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