Note to Central Banks: Get More Dollars

That is what Terrence Keeley, head of sovereign client services at UBS, prescribes in today's FT: 

In an extreme crisis, there is no alternative to the US dollar. Indeed, far from needing a new “super-sovereign currency” most central banks need more US dollars. Moreover, those dollars need to be invested in the safest instruments possible, namely US Treasury bills, notes and bonds. All other assets in a crisis are ineffective.

Over the past eight years, central banks have over-invested in illiquid assets, such as credit and equity instruments, which created the need emergency currency swap lines with the Federal Reserve once the crisis hit:

In the worst crisis in decades, central banks found their new wealth in conflict with their primary function of maintaining orderly markets and supporting the global banking system. The impulse to protect their owned capital collided with more pressing responsibilities of calming the credit markets and stabilising systemically important financial institutions. “Excess reserves”, US dollars and even gold are now seen as extremely useful, counter-cyclical tools for future crises. One should expect the world’s fastest growing institutional client segment – that is to say, central bank reserve managers, not hedge funds or even sovereign wealth funds – to have more of all three in future.

Meanwhile, in L'Aquila, China continued to voice its concerns over the greenback:

We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies' exchange rates and promote a diversified and rational international reserve currency system.

Thus, the dollar continues to play one of the most contradictory and controversial roles in the Great Recession.