LONDON (MarketWatch) -- A United Nations panel weighed into the dollar reserve currency debate, arguing for a new system of soft pegs to correct severe deficits in debtor nations like the U.S. and surpluses in countries like China.
The report from the United Nations conference on Trade and Development, issued on Monday, said the world economy would be better off with a system where governments intervene when necessary to either defend or depress their own currencies.
"A viable solution to the exchange-rate problem would be a system of managed flexible exchange rates targeting a rate that is consistent with a sustainable current-account position, which is preferable to any 'corner solution.' But since the exchange rate is a variable that involves more than one currency, there is a much better chance of achieving a stable pattern of exchange rates in a multilaterally agreed framework for exchange-rate management," said the U.N. body.
The role of the dollar reserve's status has been criticized of late, notably by Russia and China, which have called for the International Monetary Fund's special drawing rights to be used instead, a proposal that many see as impractical given the lack of availability or purchase power outside of settling international obligations.
The U.N. sees the impracticalities of the SDRs but also highlighted problems with the current system.
"An economy whose currency is used as a reserve currency is not under the same obligation as others to make the necessary macroeconomic or exchange-rate adjustments for avoiding continuing current account deficits. Thus, the dominance of the dollar as the main means of international payments also played an important role in the build-up of the global imbalances in the run-up to the financial crisis," the U.N. said.
But the report also took aim at countries like China and Germany with current account surpluses.
While debtor nations like the U.S. are compelled to reduce imports when their ability to obtain external financing reaches its limits, "surplus countries are under no systemic obligation to raise their imports in order to balance their payments."
So the U.N. wants a system where countries would manage exchange rates within a band.
It would curb speculation, prevent currency crises, prevent long-lasting imbalances, avoid debt traps for developing countries, avoid procylical conditions and minimize the need to hold international reserves.
The U.N. acknowledged such a system won't come overnight.
"Establishing such a system would take some time, not least because it requires international consensus and multilateral institution building," the U.N. said.
The Group of 20 leading industrialized and developing countries meets later this month in Pittsburgh but the dollar's reserve status isn't expected to be on the agenda