Friday, July 11, 2014

US Dollar As World’s Reserve Currency Under Threat

US Dollar As World’s Reserve Currency Under Threat
July 08, 2014 |Tom Olago
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The US dollar seems to be snowballing towards its ultimate demise as the world’s reserve currency. This is for a variety of reasons, but it would seem that China is a major cause, exploiting U.S weaknesses and economic vulnerabilities in order to advance the position of the Chinese yuan as a preferable alternative.

Voice of has recently reported that China is pursuing its quest to strip the US dollar of its global reserve currency status. After establishing the mechanisms for direct ruble-yuan trading and settlement, Beijing is now kicking the dollar out of its transactions with the Great Britain, something that was considered unimaginable just a few short years back. China has reportedly also had a string of successful attempts to establish direct currency trade with countries like Russia, Japan, New Zealand and Canada, with the UK being the latest and one of the most important additions to the list of China's successes in the global currency war.

Because most cross-currency trading is done via the US dollar, the US financial system becomes paramount for international trade, giving Washington the possibility to cripple most of the world's economies by simply restricting their access to dollar-denominated transactions. A prime example of a country suffering from such sanctions is Iran.

According to the report, Russia, China and other countries that are deeply concerned with the privileged position of the US currency are seeking opportunities to circumvent the established practices. During the visit to the UK by China's Prime Minister Li Keqiang, China's Foreign Exchange Trade System announced that it has established the framework that will allow Sterling and yuan to be directly swapped without using the US dollar as an intermediary.

If implemented successfully, this move will be a massive diplomatic victory for Beijing, as it will have by-passed the U.S exchange system in order to deal directly with the UK. The UK in turn would potentially be rewarded by moving closer to its intention of making the City of London the most important global hub for trading offshore yuan at the expense of such competitors as Frankfurt, Paris and Luxembourg.

The dollar’s reserve currency position has also been threatened from several other quarters such as the lucrative international oil trade, commonly transacted in “petrodollars.” The end result is also likely to work further to China’s advantage. For instance, Currency Wars author and analyst James Rickards was reported to have pointed out in December that the petrodollar system is collapsing because the US has abused its privileged reserve currency position by printing trillions of dollars in an effort to create inflation, and that “maybe it won’t be long before we’re all talking about the petroyuan”.

Rickards further stated that there is also a newly emerging alliance among Saudi Arabia, Israel, Egypt, and Russia that will have no particular use for US dollars and no reason to support them, marking the beginning of a significant diminution in the role of the dollar in the international monetary system. Certainly not good news for the petrodollar.

In a separate report, Voice of Russia recently interviewed Jacques Sapir, a French economist and the director of the Higher School of Social Sciences in Paris, and a prominent expert on the issue of international currency transactions and finance. Sapir concurred that Russia's and China's desire to get rid of the dollar in their gas transactions is quite likely to be fulfilled, and suggests that many countries, especially the producers of raw materials, would like to end their dependency on dollars for international transactions, depending instead on regional reserve currencies.

In Sapir’s words: "Another path is to develop currencies, which at the regional level are beginning to play the role of the regional reserve currency. I believe that China’s goal is to make its national currency, the yuan, in a few years become the reserve currency at the level of the Asia-Pacific Region, perhaps along with the Australian dollar or even the Singapore currency. As we know, there is also a project to make the ruble the reserve currency for the CIS countries… And thus, it is quite possible that there will be many currencies, which will gradually undermine the positions of the dollar as the international reserve currency."

Sapir’s comments, far from being isolated, have also been corroborated by other credible sources, such as the German Bundesbank Executive Board member Dr. Joachim Nagel. Mid last year, Voice of Russia reported that Nagel shocked the audience at a conference of the Chamber of Industry and Commerce in Frankfurt by saying that although the US dollar remains the most widely used global currency; the yuan is gaining popularity and could become a new global reserve currency.

That viewpoint is still gaining traction today, not least due to Russia aggressively working to assist China’s efforts to surmount the dollar. The Bangkok Post recently reported: “Last week, the Russian energy giant Gazprom made headlines when it announced it would start accepting yuan for payments. Since Gazprom produces 17% of the world’s gas and a whopping 83% of Russian supplies, there has been renewed talk of the yuan as a global currency — some pundits even see the US dollar fading into the background… Most analysts see China overtaking the US in absolute terms to become the world’s No.1 economy within a decade. But if differences in purchasing power are taken into account, that may happen as soon as this year.”

So is the dollar as an international currency on its deathbed yet? Not so fast: the same report suggests that despite China’s growing dominance on the global economic scene, its currency remains far from world-beating status, and advances the following supporting reasons based on figures from the Bank of International Settlements (BIS):

1. BIS data show the US dollar captures 87% of all transactions (in comparison with about 2% of global currency turnover for the yuan) implying that any currency, when exchanged, will almost always be with the dollar.

2. The rise of the yuan is said to mainly reflect moves to make it more easily convertible to the dollar, rather than to replace it.

In addition the Bangkok Post report states that the dollar and yuan are not the only currencies competing for attention in the BIS league. Though at some distance, the euro is next in line to the dollar, trailed by the yen and the British pound. The charts show the yuan has a long and hard road ahead.

Nonetheless, the US dollar as the world’s reserve currency is still clearly under sustained pressure from various quarters and will eventually crumble, as will all other currencies to pave way for a new economic world order - just as prophesied in the Biblical scriptures on the end times. These interim developments are just pieces in the overall puzzle, and it will be interesting to watch how further developments in global currency transactions will evolve towards this end.


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