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The Financial
Times reports that Brazil and China eye plan to axe dollar.
(emphasis mine) [my
comment]
Brazil
and China eye plan to axe dollar
By
Jonathan Wheatley in São Paulo
Published: May 18 2009
Brazil and China will work towards using their own currencies in trade
transactions rather than the US dollar, according to Brazil’s central
bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.
The move follows recent Chinese challenges to the status of the dollar as the
world’s leading international currency.
Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao,
China’s president, first discussed the idea of replacing the dollar
with the renminbi and the real as trade currencies when they met at the G20
summit in London last month.
An official at Brazil’s central bank stressed that talks were at an
early stage. He also said that what was under discussion was not a currency
swap of the kind China recently agreed with Argentina and which the US had
agreed with several countries, including Brazil.
“Currency swaps are not necessarily trade related,” the
official said. “The funds can be drawn down for any use. What we are
talking about now is Brazil paying for Chinese goods with reals and China
paying for Brazilian goods with renminbi.”
Henrique Meirelles and Zhou Xiaochuan, governors of the two
countries’ central banks, were expected to meet soon to discuss the
matter, the official said.
Mr Zhou recently proposed replacing the US dollar as the world’s
leading currency with a new international reserve currency, possibly in the
form of special drawing rights (SDRs), a unit of account used by the
International Monetary Fund.
In an essay posted on the People’s Bank of China’s website, Mr
Zhou said the goal would be to create a reserve currency “that is
disconnected from individual nations”.
In September, Brazil and Argentina signed an agreement under which
importers and exporters in the two countries may make and receive payments in
pesos and reals, although they may also continue to use the US dollar if they
prefer.
An aide to Mr Lula da Silva on his visit to Beijing said the political
will to enact a similar deal with China was clearly present. “Something
that would have been unthinkable 10 years ago is a real possibility
today,” he said. “Strong currencies like the real and the
renminbi are perfectly capable of being used as trade currencies, as is the
case between Brazil and Argentina.”
In what was interpreted as a sign of Chinese concern about the future of
the dollar, the governor of China’s central bank proposed in March that
the US dollar be replaced as the world’s de-facto reserve currency.
In an essay posted on the People’s Bank of China’s website, Zhou
Xiaochuan, the central bank’s governor, said the goal would be to
create a reserve currency ”that is disconnected from individual
nations” and modelled on the International Monetary Fund’s
special drawing rights, or SDRs.
Economists have argued that while the SDR plan is unfeasible now, bilateral
deals between Beijing and its trading partners could act as pieces in a
jigsaw designed to promote wider international use of the renminbi.
Any move to make the renminbi more acceptable for international trade, or
to help establish it as a regional reserve currency in Asia, could enhance
China’s political clout around the world [and
would weaken the dollar].
My reaction: China
wants to stop trading in dollars as soon as can. There is only one key point
to take away from this article.
1) Brazil
and China are working towards using their own currencies in trade
transactions rather than the US dollar.
“What we are talking about now is Brazil paying for Chinese goods with
reals and China paying for Brazilian goods with renminbi.”
Conclusion: As
the yuan becomes an international currency, the dollar will fall.
1) China clearly wants to start settling trades in yuan instead of dollar.
2) To allow international trades to settle in yuan, China must allow foreign
central banks to hold yuan reserves.
3) If centrals banks have the choise between holding their reserves in yuan
or dollars, they will choose dollars (China has the world’s best
economic fundamentals, and the US has the world’s worst economic
fundamentals)
4) Any shift in the reserves of foreign central banks will cause the dollar
to fall rapidly.
Eric
de Carbonnel
Market Skeptics
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