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Leading economies should consider adopting a modified global
gold standard to guide currency rates, World Bank president, Robert Zoellick,
said on Monday in a surprise proposal before a potentially acrimonious G20
summit.

Writing in the Financial Times, Mr. Zoellick called for a
“Bretton Woods II” system of floating currencies as a successor to the Bretton
Woods fixed-exchange rate regime that broke down in the early 1970s.

The former U.S. trade representative, who served in several
Republican administrations, said such a move “is likely to need to involve the
dollar, the euro, the yen, the pound and (a yuan) that moves towards
internationalisation and then an open capital account.

“The system should also consider employing gold as an
international reference point of market expectations about inflation,
deflation, and future currency values,” he added.However, analysts were
cautious.

“Going forward, that would be something that we could look
towards, but it’s not going to happen within a short period of time,” said Ong
Yi Ling, analyst at Phillip Futures in Singapore, adding that gold prices
barely reacted to the comments.

Gold briefly hit a record high of $1,398.35 an ounce in early
trade on Monday on concerns of a continued weakening dollar trend, after the
U.S. Federal Reserve last week acted to resume buying treasuries.

Summit acrimony?

That policy has fed acrimony among leading economies in the
Group of 20 in the run-up to their summit in Seoul on Wednesday and Thursday.

China and Germany, major exporting nations, have both decried
the Fed’s quantitative easing – effectively printing money – which is weakening
the dollar.

Investors are pumping dollars into emerging markets in search of
higher yields, and the potentially destabilising impact of this, along with big
current account deficits and surpluses, as well as China’s reluctance to let
the yuan appreciate faster, are set to dominate the G20 debate.

France, which takes over the G20 chair after this week’s summit,
says it plans to work on a new international monetary system to bring greater
currency stability.

Beijing’s central bank chief has suggested an alternative
monetary system based on using the International Monetary Fund’s Special
Drawing Rights, a notional unit of value based on a basket of major currencies,
instead of the dollar as the sole global reserve currency.

Mr. Zoellick was a senior official in the U.S. Treasury at the
time of the 1985 Plaza and 1987 Louvre Accords on rebalancing currencies among
major industrialised nations. He noted that that phase of currency coordination
helped launch the Uruguay Round of world trade liberalisation negotiations.

While his opinion article in the Financial Times did not
represent either U.S. or World Bank policy, it may reflect a greater openness
in Washington than in the last two decades to some form of international
currency cooperation.

“The dollar is losing its relevance, especially with the
emergence of Asia economies, so a more neutral benchmark may be required. Gold,
amid all the recent uncertainty, is proving its worth,” said ANZ’s senior
commodity analyst, Mark Pervan.

Gold retreated to around $1,390 an ounce by 1000 GMT as
speculators booked profits.

Mr. Zoellick said a new monetary system would take time to
develop and should be part of a package approach, including possible changes in
IMF rules to review capital as well as current account policies, and linking
IMF monetary assessments to World Trade Organisation obligations.

The dollar rose sharply on Monday as unwinding of dollar short
positions that began with solid U.S. jobs data snowballed, pushing down the
euro to its lowest level since the Fed embarked on fresh easing last week.