Fed Would Act Against Dramatic Dollar Fall: OECD

The U.S. dollar is likely to keep its position as the leading reserve currency and a sharp devaluation of the currency is unlikely, the OECD's chief economist Klaus Schmidt-Hebbel said.

In an interview as the thinktank released its new economic outlook, he said the dollar's recent decline against some other currencies would help the economy but that he did not think U.S. officials would accept a dramatic shift.

"I think that is a possibility but I think it is highly unlikely because the U.S. Federal Reserve is too much aware of this risk and they would act very strongly and very significantly against this," he said.

Reserve holders China and Russia have started a debate about reserve currencies ahead of a summit of G20 leaders on Thursday by proposing to use the International Monetary Fund's Special Drawing Rights as a new global reserve currency.

"I think the U.S. currency is and will remain one of the key reserve currencies in the world and for the time being the most important one," he said.

But he said that there was a "very slow trend" for the euro to displace the dollar in foreign currency reserve holdings.

"It would certainly be another severe strain, another stress point if this sort of slow trend to more euro participation in the world portfolio were to be replaced by a sudden shift away from the dollar," he said.

He said the pound's recent weakness against other currencies was also a correction which would help Britain recover from the economic slump.

"It probably implies a correction of an overappreciation that had taken place before," he said. "It certainly would be a factor which will help the UK economy to get out of the recession through exports so I would say it is a market induced correction which will help the UK."

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He also said he saw little risk of a round of competitive devaluations after the Swiss National Bank intervened to weaken the franc as part of a monetary policy operation.

"Switzerland is a small player in the world of currencies...so I don't think this is a real risk."

Eurozone Debt

He shrugged off the possibility of a default in the euro zone, saying "I think countries are doing the right thing to avoid default."

But if a euro zone country did run into trouble, he said his understanding was that euro zone rules did not allow for one country to bail out another one or for the European Central Bank to step in.

"In the euro area there is simply no recourse to cross national budgetary support," he said. "One country cannot bail out another."

"Certainly they should not get support from the ECB because it would violate the principle which is a very clear separation between monetary and fiscal policy. It would be to some extent the end of a project of common monetary union if the country could run to the common central bank and get liquidity."

If a country were to run into trouble any time soon, it would have to turn to the International Monetary Fund, he said.

"I guess in the short term given that the European Union and the Commission in Brussels don't have these types of instruments, the natural way is to go to Washington to the IMF," he said.

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