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FOCUS-Dallas Fed endorses dollarization

By Marjorie Olster

DALLAS, March 7 (Reuters) - A week after Ecuador's Congress voted to adopt the dollar as the nation's main currency, the Federal Reserve Bank of Dallas on Tuesday endorsed to the idea that emerging economies struggling with inflation might adopt the dollar in lieu of their own currencies.

Dallas Fed bank president Robert McTeer threw his weight firmly behind the idea at the conclusion of a two-day conference on dollarization hosted by the regional Fed bank.

``Speaking for me and some folks from the Dallas Fed, we do think that dollarization is probably a good idea. Speaking for me only, it's about as close to a free lunch as you can get,'' McTeer said. He noted he was not speaking for the U.S. central bank, adding the Fed has no official position on the matter.

Panama has used the dollar as its currency for nearly a century. McTeer said other countries could instantly reap the benefits of a stable currency without having to endure decades of austerity.

``We get to keep on doing what we are doing, promoting sound money and price stability, and others are able to import that sound money and the ever-so-wise policies of the Federal Reserve.''

His audience included former Argentine President Carlos Menem, who last year proposed adopting the dollar and dropping the Argentine peso, as well as Mexico central bank head Guillermo Ortiz.

Proponents of dollarization at the conference said it would end the vicious cycle of inflation and poverty in Latin America, lowering inflation and interest rates and bringing the benefits of more trade and foreign investment. But critics said dollarized countries would be too dependent on U.S. monetary policy, more vulnerable to political pressure from Washington and would lose a vital symbol of national sovereignty.

Ultimately, the decision on whether to back dollarization would come from the U.S. Treasury, in consultation with the Fed, McTeer said. But countries that want to dollarize do not need the approval of the U.S. government.

Menem said he thought dollarization was the only way out of the financial distress that has plagued Latin America for decades.

Argentina's peso is has been pegged one-to-one to the dollar since 1991. Menem, Argentina's departing president, floated the dollarization idea last year after his economy was battered when neighboring Brazil devalued its currency, the real. But the three-month-old govenrment of President Fernando de la Rua says it wants to keep the current system.

Last week, Ecuador's Congress voted to adopt the dollar as the nation's main currency as part of a controversial government plan to stabilize and stimulate an economy mired in its worst crisis in five decades.

Other nations where dollarization has been discussed include Mexico, Guatemala and Costa Rica, although none of those countries is currently considering a proposal to abandon its currency and adopt the dollar.

Fed Chairman Alan Greenspan has made clear the U.S. central bank would never compromise U.S. national interests when setting interest-rate policy to take into account the impact of U.S. monetary policy on another country's economy.

U.S. Treasury Secretary Larry Summers also has said any country that chooses to dollarize cannot expect the United States to offer special treatment on interest rates or oversight of its financial system.

McTeer said the relative ease with which 11 European nations launched a single currency, the euro, last year, indicated other countries could carry off a switch to the dollar. He said such a move could make sense for countries like Argentina, which is working to overcome market perceptions generated by its history of high inflation and instability.

``If Europeans did what they did without the impetus of a crisis, it does seem that dollarization is doable, especially in Latin America where you can usually get a crisis if you need one,'' McTeer said.