The US dollar slipped against the euro and the yen on Tuesday in the wake of a story published by The Independent, in which the paper's Middle East correspondent Robert Fisk said that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the dollar with a basket of currencies in oil transactions.

The paper said that the secret discussions had been prompted by China's new financial power, as well as past resentment over America's ability to interfere in the international financial system. Fisk cited unnamed Gulf Arab and Chinese banking sources in Hong Kong, who said that the plans "will change the face of international financial transactions."

Countries deny allegations

Top officials from countries named in the report denied their involvement in secret talks. Speaking on the sidelines of International Monetary Fund (IMF) and World Bank meetings in Istanbul, Saudi Arabia's central bank chief Muhammad al-Jasser told Reuters news agency that the newspaper story was "absolutely incorrect."

Russia's deputy finance minister Dmitry Pankin also denied that the subject had been discussed. And a source at the United Arab Emirates central bank told Reuters that Gulf Arab oil exporters will stay with the dollar as the currency for trading oil, saying "it would be difficult for producing countries to change."

Dealers said the media report served to confirm recent negative sentiment toward the dollar.

"There has been similar talk before, but this comes as concern over the dollar's place in the world is increasing," Yuzo Sakai, manager at brokerage Tokyo Forex & Ueda Harlow told Dow Jones Newswires.

Indeed, talk about the dollar losing its hegemony as a global currency is nothing new. Many experts say it's another sign of the changing world economic order in part brought about by the global financial crisis: the traditional economic powerhouses of the West are struggling to recover, while emerging nations such as the Brazil, Russia, India and China are growing in leaps and bounds - and demanding more influence in the global arena.

Make way for the SDR

But if the dollar really is on the way out, is there an alternative global currency waiting in the wings? As former IMF executive director Onno de Beaufort Wijnholds stated in a recent opinion piece, the euro has emerged as a serious competitor to the dollar. But despite the euro's greater international role, he doesn't think the euro will overtake the dollar as the dominant reserve currency.

"Such an outcome is probably only possible if two conditions are met: first, the United Kingdom joins the euro area, and, second, the United States makes serious, confidence-sapping mistakes," Wijnholds wrote. "Moreover, the European Central Bank has repeatedly stated that it neither encourages nor discourages the euro's international role."

Increasingly, experts such as Wijnholds are talking about another rival to the dollar - the special drawing right, or SDR. Created in 1969, it is the "currency" of the IMF, deriving its value from a basket of currencies that includes dollars, euros, yen and pounds.

Largely dormant since its inception, the SDR is undergoing a revival. In March, the head of China's central bank argued that the time had come for the SDR to replace the dollar as the world's "super-sovereign reserve currency." US Treasury Secretary Timothy Geithner has also endorsed a greater role for SDRs, and at the G-20 summit in April, world leaders supported an SDR allocation of $250 billion (170 billion euros).

US economist Joseph Stiglitz called the G-20's decision a "major step" toward establishing the SDR as a global reserve currency. Analysts have also noted that such a transition would be a good thing for the US, as the dollar would live on, but in a more stable configuration in which no one national currency reigns supreme.

However, that was before The Independent reported on alleged secret meetings about ditching the dollar in oil deals. Correspondent Robert Fisk writes that "the Americans…are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs."

Whether the transition from the dollar to an alternative global reserve currency will be peaceful or spark a "future economic war" - as predicted in The Independent - remains to be seen.

Author: Deanne Corbett
Editor: Sam Edmonds