Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24
THE GLOBAL WARMING CLIMATE CHANGE MEGA-TREND IS THE INFLATION MEGA-TREND! - 3rd May 24
Banxe Reviews: Revolutionising Financial Transactions with Innovative Solutions - 3rd May 24
MRNA - The beginning of the end of cancer? - 3rd May 24
The Future of Gaming: What's Coming Next? - 3rd May 24
What is A Split Capital Investment Trust? - 3rd May 24
AI Tech Stocks Earnings Season Stock Market Correction Opportunities - 29th Apr 24
The Federal Reserve's $34.5 Trillion Problem - 29th Apr 24
Inflation Still Runs Hot, Gold and Silver Prices Stabilize - 29th Apr 24
GOLD, OIL and WHEAT STOCKS - 29th Apr 24
Is Bitcoin Still an Asymmetric Opportunity? - 29th Apr 24
AI Tech Stocks Earnings Season Opportunities - 28th Apr 24
S&P Stock Market Detailed Trend Forecast Into End 2024 - 25th Apr 24
US Presidential Election Year Equity Performance in the Presence of an Inverted Yield Curve- 25th Apr 24
Stock Market "Bullish Buzz" Reaches Highest Level in 53 Years - 25th Apr 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

China’s Plan to Dethrone the U.S. Dollar as Worlds Reserve Currency

Currencies / US Dollar Oct 12, 2010 - 05:21 AM GMT

By: Money_Morning

Currencies Best Financial Markets Analysis ArticleDon Miller writes: The U.S. dollar is on the way out as the world's top reserve currency. And as Money Morning Chief Investment Strategist Keith Fitz-Gerald predicted more than a year and a half ago, the yuan could be set to replace it.

The greenback has served as the world's benchmark reserve currency since the mid-20th century, but soaring deficits and the U.S. Federal Reserve's loose monetary policy have drained the dollar's value.


Meanwhile, emerging markets - many of which are vibrant manufacturing hubs, net creditors, and have rich caches of commodities - are more fiscally sound than the United States, which has a $1.3 trillion budget deficit.

"If you look at the fundamentals of a lot of these emerging markets, they are considerably better than developed markets," Kenneth Akintewe, a Singapore-based investment manager at Aberdeen Asset Management PLC told Bloomberg in an Oct. 11 interview. "Who wants to be holding U.S. dollars at this stage?"

China, which leads the world with more than $2 trillion in currency reserves held mostly in U.S. Treasuries, is chief among the countries seeking respite from the dollar's decline. Beijing has long bemoaned the depreciation of the dollar, stating outright that it should be replaced as the world's main reserve currency.

As U.S. policymakers ratchet up criticism of the yuan, Bank of China (BOC) Governor Zhou Xiaochuan said Sunday that China would continue to move away from U.S. debt, and instead pursue more favorable long-term investments.

"We can diversify more the foreign reserves, to consider not only smaller countries, but some emerging-market economies," Governor Zhou said at an event during a meeting of the International Monetary Fund (IMF) in Washington. With increased assets, "you can shift some to riskier, but higher-return investment instruments."

China almost tripled its holdings of South Korean government bonds to $4.6 billion (5.15 trillion won) in the first nine months of this year, according to South Korea's Financial Supervisory Service. Peruvian central bank President Julio Velarde said in an interview in August he is "surprised" to see several monetary authorities buying government bonds denominated in the sol.

Mexico is seeing "very active" interest from Chinese investors in the country's local-currency government bonds, Octavio Lara, deputy general director of debt issuance at Mexico's Ministry of Finance, said Sept. 15.

Of course, this is hardly a dramatic shift. To the contrary, China has been telegraphing the move for years. In March 2009, Zhou himself released an essay entitled "Reform of the International Monetary System" on the BOC's Web site. The report called for the "re-establishment of a new and widely accepted reserve currency with a stable valuation" to replace the U.S. dollar - a credit-based national currency.

"The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies," Zhou said. "Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws."

Zhou recommended that the IMF's Special Drawing Right (SDR) be given special consideration, but China's true intent - as suggested by Fitz-Gerald - seems to be to have the yuan take over.

"China's currency is likely to be granted a global status on par with the current major currency trading pairs for purposes of settling international transactions, whether the West wants that to happen or not," Fitz-Gerald wrote in a May 2009 article. "In fact, I'd even go so far as to say the dollar's days of dominance are numbered and with each new round of bailout chicanery, the clock is winding down ever faster."

China has arranged currency swaps with many of its trading partners to accelerate the transition. These agreements allow China to receive yuan, instead of dollars, for its exports.

Previously, as the dollar has been the primary reserve currency for international trade, an importer would have to cross two "spreads," first converting, for example, Korean won to U.S. dollars, and then the dollars to Chinese yuan. But the swaps make it easier for emerging markets to buy China's goods, and in the process symbolically raise the yuan's profile on the global economic stage.

So far, China has set up currency swaps with Argentina, Russia, South Korea, Hong Kong, Indonesia, Malaysia, and Belarus. As China builds a larger network of swap agreements it can trade directly with its trading partners without ever having to put their currency on the open market - and with no need to settle in dollars. For instance, Brazil could use its yuan to buy goods and services from Indonesia or Malaysia.

This strategy undermines the dollar while steadily building a global marketplace for its currency, the yuan.

"For Westerners who are struggling to come to terms with the notion of a disarrayed dollar, the thought of oil, gold or other commodities being priced in yuan instead of dollars has to seem about as likely as having another country put a man on the moon," says Fitz-Gerald. "But the Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange and the proverbial genie, as they say, is out of the bottle."

Global foreign reserves have more doubled from $4 trillion at the end of 2005, according to data compiled by Bloomberg and the IMF. Developing nations held $5.5 trillion as of June.

However, the dollar's share of worldwide reserves has declined to 62% in June from 73% in 2001, according to data compiled by the IMF. The euro's share, the world's second-largest reserve currency, fell to 26.5% in June this year, from a record 28% in September 2009.

Source : http://moneymorning.com/2010/10/12/china-dollar-4/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
12 Oct 10, 14:12
Dollar Dethroning Good For The USA?

Would dollar dethroning be good for the USA? I think so, and it certainly could not make things any worse. It would force federal govenment politicians and economists attention away from schemes and scams, and make them think about our country making an honest living. Of course, the transition would be painful, sort of like an alcoholic giving up booze.

We now have a country ruled by special interests, deal makers, bankers, lobbyists, and on-the-take politicians. This would all change, howbeit slowly.

We now have a country that is excessively colonialistic and militaristic, and which interfers excessively in internal affairs of other sovereign nations--these activities for the most part are very expensive and offensively immoral. This would change, howbeit not overnight.

I could go on and on about unemployment, unfair wealth distribution, corrupt and stupid government multi-trillion dollar spending and borrowing, the CIA, Obama and Bernanke, etc., etc., but I won't.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in