The U.S. dollar has been the world’s reserve currency for decades, but that position might be under attack. With the rising level of U.S. debt, many countries around the world are questioning the position of the U.S. dollar as the reserve currency.
Cracks are beginning to appear; the latest sign is that China and South Korea have come to an agreement in which banks from either country are able to borrow funds from a swap line that makes loans available to companies for deals in local currencies. (Source: “China, South Korea to Boost use of Local Currencies in Trade,” Bloomberg, December 4, 2012.)
This swap line is currently set at $59.0 billion, and allows firms to settle deals in either the Chinese yuan or the South Korea won instead of the U.S. dollar. On the surface, this might not seem like a direct attack on the U.S. dollar’s status as reserve currency, because reducing transaction costs is inherently advantageous to corporations. However, the willingness by these nations to increasingly avoid the U.S. dollar is a problem.
Shifts in the reserve currency status take many years to develop. We’ve seen rising U.S. debt levels for years, and this is putting increasing pressure on countries to diversify away from the reserve currency nation that is becoming increasingly irresponsible in the way it handles fiscal and monetary policies.
Running up the U.S. debt levels over the short term might be seen as innocuous by American politicians; but over the long term, the sustained inability and ineptitude of politicians to properly manage government spending will lead to a lack of belief in the country … Read More
I’ve penned articles recently on China’s quest to have the next reserve currency of the world be the renminbi, otherwise known as the yuan and China’s official currency.
In unprecedented steps to circumvent the use of the U.S. dollar for the first time since the inception of the U.S. dollar as the reserve currency, China, Russia, Australia, the United Arab Emirates, and India are now transacting business with China denominated in yuan and not U.S. dollars.
The BRICS countries—Brazil, Russia, India, China, and South Africa—have decided they will trade with each other in their respective currencies, circumventing the use of the reserve currency entirely.
Since China has created transactions in yuan with Brazil, Russia, and India, South Africa was the “odd man” out—but not anymore. It is no secret that South Africa has the farmland and natural resources that China needs for its large population. What South Africa is missing is the capital to farm the land and get those resources to market. China has the capital, so South Africa will most certainly listen to China’s terms.
China and South Africa have agreed to use the yuan in their transactions, and more central banks in Africa are including the yuan as part of their foreign reserves.
China was also busy in the month of June signing a trade agreement, with Chile with the aim of doubling their trade in three years. Similar to Africa, China will provide the capital to expand Chile’s agricultural capabilities and enhance more mining exploration. Part of the agreement is to settle all transactions in yuan.
Of course, the yuan cannot be a reserve currency as … Read More
In a previous article, I wrote about the U.S.’s grave mistake in cutting off the emerging economies from using the U.S. dollar—the reserve currency—in transactions with Iran.
I argued that these countries not only represented a significant portion of the population of the world, but they are also the fastest growing economies in the world.
For the first time in their history, this month, the second-largest economy of the world, China, and the third-largest economy of the world, Japan, began a foreign exchange system to trade in yen and yuan directly, without the use of the reserve currency.
All trade that occurred between China and Japan was previously transacted in U.S. dollars. No more reserve currency.
This, of course, comes on the heels of Russia and China trading in their own currencies, once again circumventing the reserve currency of the world.
The use of the U.S. dollar—the reserve currency—among emerging nations will continue to decline, as the BRICS countries—Brazil, Russia, India, China, and South Africa—have decided they will trade with each other in their respective currencies, circumventing the use of the reserve currency entirely.
China has led the charge against the reserve currency to the point of even directly using its own currency—the yuan—in transactions with Australia and United Emirates, when all previous transactions were denominated in U.S. dollars.
When the initial sanctions were placed on Iran, China urged the other emerging nations to use the yuan instead of the reserve currency. India chose to use its own currency instead of the yuan, while other emerging economies bartered with Iran by exchanging oil for various food stuffs.
So, what happens … Read More
The U.S. dollar has reigned supreme as the reserve currency of the world for decades. This reserve currency status appears to be ending, albeit at a slow pace. Shifts in reserve currency don’t happen overnight, as they become entrenched in the financial system. The U.S. dollar took over reserve currency status from the British pound, following World War II. The new player on the game that wants to become the new reserve currency is China, with its yuan.
There have been numerous reports lately that the Chinese authorities are preparing for the day when the yuan will be the reserve currency for the world. They’ve started establishing business capabilities that make it easy for investors and companies to trade using the yuan. Just recently, it was announced that the People’s Bank of China is allowing direct trading between the Japanese yen and yuan. It used to be that an investor or company would need to perform a currency cross to make this trade happen. One would sell yuan, buy the U.S. dollar, then sell the U.S. dollar and buy the Japanese yen. This ease in trading will just add more credence to the possibility that the Chinese authorities’ end goal many years from now is reserve currency status.
Another worrisome sign for the U.S. dollar is news that the Shanghai Futures Exchange will be introducing a new oil contract that will be listed in both the U.S. dollar and the yuan. This added legitimacy for the yuan as a reserve currency will only grow if more products that are globally traded are transacted in that currency. The head of this … Read More