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China To Challenge US Dollar Reserve Currency Status

Tyler Durden's picture




 

From GoldCore Gold Bullion

China To Challenge US Dollar Reserve Currency Status

Today’s AM fix was USD 1,786.50, EUR 1,380.92, and GBP 1,109.01 per ounce.
Yesterday’s AM fix was USD 1,777.25, EUR 1,374.73and GBP 1,102.38 per ounce.

Silver is trading at $35.08/oz, €27.13/oz and £21.84/oz. Platinum is trading at $1,707.00/oz, palladium at $664.50/oz and rhodium at $1,180/oz.

Gold edged up $3.40 or 0.19% in New York yesterday which saw gold close at $1,778.50. Silver initially climbed to $34.848 then it fell off in afternoon trading and finished with a loss of 0.06%. 


Cross Currency Table - (Bloomberg)

Gold inched up on Thursday, continuing its 4th day of gains as investors await more clues from central banks on further stimulus plans.

Today, The ECB has a rate decision at 1145 GMT and Bank of England at noon local time.  

Investors will watch the key the nonfarm payrolls figure on Friday to determine if QE3 is beginning to stimulate the US economy.

Alan Wheatley, Global Economics Correspondent for Reuters has written a very interesting article, 'Analysis: China's currency foray augurs geopolitical strains’ where he emphasizes China’s desire to wean out the US dollar’s currency reserve status.

China is actively taking steps to phase out the US dollar which will decrease volatility in oil and commodity prices and deride the ‘exorbitant privilege' the USA commands as the issuer of the reserve currency at the centre of a post-war international financial architecture which is now failing.  

In 1971, U.S. Treasury Secretary John Connally said, "It's our currency and your problem".

China is frustrated with what it sees as the US government’s mismanagement of the dollar, and is now actively promoting the cross-border use of its own currency, the yuan, or also called the renminbi, in trade and investment.

China’s goal is to decrease transactions costs for Chinese importers and exporters.

Zha Xiaogang, a researcher at the Shanghai Institutes for International Studies, said Beijing wants to see a better-balanced international monetary system consisting of at least the dollar, euro and yuan and perhaps other currencies such as the yen and the Indian rupee.

"The shortcomings of the current international monetary system pose a big threat to China's economy," he said. "With more alternatives, the margin for the U.S. would be greatly narrowed, which will certainly weaken the power basis of the U.S."

Zha's comments were highlighted at a seminar in Bahrain this week on the geopolitics of currencies organized by the International Institute for Strategic Studies, a London think tank.

GoldCore brought up these issues back in 2005. Rising economies of China, India and the Middle East are looking at trading options that do not include the greenback.

Not only the East but their financial ministry colleagues in the West are also questioning the current monetary order.  Change is certainly around the corner.

At the Clinton Global Initiative last week Goldman Sachs CEO Lloyd Blankfein said that the US could risk its status as the world's reserve currency if congress fails to act and the "fiscal cliff" program of tax increases and spending cuts is enacted January 1st. 

If the US continues its trillion dollar deficits and does lose its reserve currency status what will a world without a reserve currency look like?  That is what economists, think tanks and finance ministers are grappling over today.

John Williamson, one of the foremost academics on exchange rates, and a senior fellow at the Peterson Institute for International Economics in Washington examined the benefits of the US dollar’s reserve status.

He recognized two ways that US power is enhanced in the world economy by the greenback’s dominant role, which he doesn’t see challenged in the next 25 years.  

First, the $3.2 trillion in official reserves that China has accumulated in maintaining the yuan's semi-fixed peg to the dollar tie Beijing's policy hands. That is because any hostile gesture, such as a threat to shift out of dollars, would destroy Chinese wealth.

Second, because of the extensive private use of the dollar globally, the United States is better able to enforce a financial embargo such as the one now directed against Iran.

China also faces risks including foreigners reinvesting their yuan back into China’s security markets.  Such inflows may alter exchange rates and interest rates and would weaken the Communist Party’s grasp on their economy which would create an unpredictability that is against the iron rule it enjoys.

Currency wars are not new and often rising economies show their resentment of incumbents, notably the USA, who they view as printing money first and worrying about the effect on the global economy later.

Surjit Bhalla, Indian economist and author of "Devaluing to Prosperity” feels the massive undervaluation of the yuan was a major reason for China's meteoric rise and the deep economic imbalances that led to the 1997/98 Asian financial crisis and the 2008 global crash.

He sees little merit in greater international use of the yuan but expects Beijing to push up its real exchange rate by 3-5% a year in order to help lift private consumption to at least 50 percent of national output over time from around just 35 percent now.

"This will be one of the most remarkable win-win situations of recent times," said Bhalla, chairman of Oxus Investments, a New Delhi hedge fund. "Currency peace is breaking out. There have been currency wars, but now is time to enjoy the peace."

For breaking news and commentary on financial markets and gold, follow us on Twitter.

NEWS

Gold holds ground; eyes on central banks, U.S. data - Reuters

Gold inches up, long-term prospects seen promising – Market Watch

Gold rises after U.S. job data, defies drop in oil - Reuters

COMMENTARY

Analysis: China's currency foray augurs geopolitical strains – Reuters

Back to Gold – Eventually
– Asia Times

Silver - The People's Metal
– Financial Sense

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Thu, 10/04/2012 - 10:31 | 2855685 Lohn Jocke
Lohn Jocke's picture

They DID invent the printing press... or did they?

Thu, 10/04/2012 - 10:46 | 2855726 Pladizow
Pladizow's picture

De Gaulle knew in 1965: http://www.youtube.com/watch?v=Q9r1NLMFixo

Lohn Jocke: I think it was the Germans that invented the printing press and the Chinese who had the first paper fiat currency.

Thu, 10/04/2012 - 10:53 | 2855770 Deo vindice
Deo vindice's picture

Either way the middle class is under attack.

It is either death by a thousand cuts or death by a thousand taxes.

The end game for them is still death of middle class society.

Thu, 10/04/2012 - 11:02 | 2855789 Landotfree
Landotfree's picture

The article is stupid.  

http://2.bp.blogspot.com/--RkLZLRlRi8/UGAGOUg7fNI/AAAAAAAAABs/HHgMlfUYP2...

China can stop all international trade if it wants, collapse of the global credit system would be fairly quick... then they would have to start rolling out the tanks to smush their people.  

The system unable to exponential expand, not much the US can do about it other than to delay as much as possible... collapse is always the end result of using the equation.

I figure 100-400 million unfunded China men are going to have to go... everyone loves the party, not many like the liquidation.  China has resorted to building cities with no people in it to try and delay the unavoidable.  I am sure they will try other things as well... eventually they will try and burn the empty cities so they can just build over it again.   

 

Thu, 10/04/2012 - 11:04 | 2855818 Clint Liquor
Clint Liquor's picture

Claiming the USD is 'too big to fail' is historically ignorant. World commerce will continue (after some adjustment) as it has throughout the centuries whenever a currency loses it's reserve status.

Thu, 10/04/2012 - 11:27 | 2855914 nope-1004
nope-1004's picture

The article is "stupid" only if you believe the rest of the world will sit back and take the idiocy coming from the Fed.  Other countries are starting to say ENOUGH!  Why does China and Brazil need the US dollar anyway?  What good is it to them, other than it causes all kinds of currency conversion issues and inflationary pressure? 

This is the trend going forward.  The US dollar will not be sole reserve currency.  This is the story of the decade and has much larger bearing than most understand.  US middle class earnings will most definitely fall - they have to, because you will be compared with producing somehting that someone else will do for much less pay in another nation.

Only 3,300 views of this topic when I chimed in, and the topic is way down the page already, shows me many don't understand or care.  This is the black swan for the middle class, if there ever was one.

 

Thu, 10/04/2012 - 11:51 | 2855999 LawsofPhysics
LawsofPhysics's picture

so, remind me.  How is replacing one fiat by another fiat "winning" again?

Thu, 10/04/2012 - 13:15 | 2856281 nosesocks
nosesocks's picture

It changes who "wins".

Thu, 10/04/2012 - 13:31 | 2856337 LawsofPhysics
LawsofPhysics's picture

No it doesn't.  Unless you are suggesting the "elite" families will somehow change.  

Thu, 10/04/2012 - 16:12 | 2857129 ultimate warrior
ultimate warrior's picture

China and Russia have alot of gold. The new reserve currency will be backed by gold.

Thu, 10/04/2012 - 11:44 | 2855960 Landotfree
Landotfree's picture

"Claiming the USD is 'too big to fail' is historically ignorant. World commerce will continue (after some adjustment) as it has throughout the centuries whenever a currency loses it's reserve status."

I never claimed any such thing, the whole system will fail.   The global credit system will collapse and China will roll out thier tanks not against other countries but to smush their people, been there done that... this time they will have to do it on a massive scale.

Thu, 10/04/2012 - 12:38 | 2856130 MeBizarro
MeBizarro's picture

Wins the award for the most ignorant and misguided comment in the thread which flies in the face of history.  Go look at what happens to trade levels historically when there is an issue with the dominant form of currency used for transactions & trade levels. 

Hell, just look most recently at the sterling and world trade levels. After the sterling lost its reserve currency position after WW1, global trade levels didn't approach pre-WW1 levels after well into the mid-1950s. 

Thu, 10/04/2012 - 20:33 | 2857933 Tompooz
Tompooz's picture

The empty cities are a central planner's wet dream. The migration from countryside to cities is still in full swing. Empty cities will allow for all kinds of novel (competitive) social experiments.

Thu, 10/04/2012 - 10:58 | 2855796 richard in norway
richard in norway's picture

i want to ask a stupid question, looking at the collape of the iranian rail how long is it before they issue a gold backed currency, is that possible, but i cant see that they have a choice, but they would then have problem  of gold rising  in price, swaping inflation for deflation. am i missing something?? like ddo tthey hhave enough gold to back a currency

Thu, 10/04/2012 - 10:59 | 2855807 Landotfree
Landotfree's picture

The current system runs on credit not money.   Going to some other standard is not going to work.  Sorry, the unfunded liabilities are going to have to be liquidated first.  

Thu, 10/04/2012 - 11:05 | 2855823 CommunityStandard
CommunityStandard's picture

Wealthy leaders will never support a gold standard.  It prevents them from extracting wealth from the people through inflation, which more subtle than direct taxation.

Thu, 10/04/2012 - 11:12 | 2855851 ParkAveFlasher
ParkAveFlasher's picture

They'll support it when they realize that the end of every currency is starvation for them too.

Thu, 10/04/2012 - 11:42 | 2855961 Landotfree
Landotfree's picture

Whether you are on a gold, silver or dirt standard is irrelevant as long as you attach interest to your medium of exchange.

Thu, 10/04/2012 - 11:52 | 2856005 kridkrid
kridkrid's picture

Yup. Exactly as unsustainable when you add interest and leverage. The only the a gold standard does is provide an air of legitimacy. Any other benifit exists in any other system (I.e convertibility). People should be converting their paper money for hold today, just as if the money was backed by gold.

Thu, 10/04/2012 - 11:52 | 2856007 dark pools of soros
dark pools of soros's picture

you mean imperialists.. Gaddafi had no desire for fiat or debt

Thu, 10/04/2012 - 12:05 | 2856040 CommunityStandard
CommunityStandard's picture

Gaddafi took the other approach.  He just nationalized the oil industry and killed anyone who disagreed.  No debt necessary.

Thu, 10/04/2012 - 12:45 | 2856162 Anusocracy
Anusocracy's picture

Sort of like the large chunk of a person's income that most countries nationalize and that can cause your death if you resist.

 

Thu, 10/04/2012 - 16:13 | 2857134 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Yep, nationalized it, the returned more of the oil wealth to the people than any other ME ruler. Free education, free healthcare, free electricity, and the highest wages in the area:

http://libyasos.blogspot.com.au/p/gaddafi.html

He was about to receive a UN humanitarian award, right before we bombed him. Might have been because he loaned billions to Unicredito and they didn't feel like paying it back. Or the fact he was running around Africa proposing a gold-backed dinar.

Thu, 10/04/2012 - 14:30 | 2856581 NoTTD
NoTTD's picture

You're thinking of spaghetti.  Same thing.

Thu, 10/04/2012 - 16:09 | 2857112 MillionDollarBoner_
MillionDollarBoner_'s picture

Blankfein commenting on risk from the Fiscal Cliff?

That's rich...he and his buddies fucking caused it!!!

Thu, 10/04/2012 - 10:31 | 2855688 mayhem_korner
mayhem_korner's picture

 

 

Fiat rattling.  Next phase of the nouveau cold war.

Thu, 10/04/2012 - 10:40 | 2855715 kridkrid
kridkrid's picture

It won't be cold forever.

Thu, 10/04/2012 - 10:33 | 2855696 Boilermaker
Boilermaker's picture

Yes, yes...China...they are so much better.  No worries there.

Thu, 10/04/2012 - 10:37 | 2855709 fuu
fuu's picture

Still waiting for the pre-2:30 smack down.

Thu, 10/04/2012 - 10:37 | 2855712 LawsofPhysics
LawsofPhysics's picture

Riiiiiigggggghhhhtt.

I am sure China (a communist, state-run, centrally planned society) will be considerably more transparent.

FAIL.

Will everyone soon be working for Chinese wages?  Now that is the dream of the "elites" and another story altogether.

Thu, 10/04/2012 - 10:41 | 2855724 fonzannoon
fonzannoon's picture

My wife is a designer. Her assistant just quit recently to work in Manahattan. She has been interviewing lately and she keeps complaining that no one wants the job. I was surprised and asked why that was. She said their company is offering crappy pay. I asked what they offered (my guess was around 40k). She said they will pay $12/hr with no benefits. I was floored. So yes you are correct that is the plan....

Thu, 10/04/2012 - 10:53 | 2855768 fuu
fuu's picture

I thought you were going to say she made $89/hr.

Thu, 10/04/2012 - 11:03 | 2855816 RSBriggs
RSBriggs's picture

From home.  On her keyboard/webcam.

Thu, 10/04/2012 - 16:16 | 2857146 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

I'm thinking of a name for my new wifi netrwork at hime. My son proposed the following:

1. Surveillance Van

2. Really, asshole? Curry again?

3. Shower Cam Live Feed

But we settled on BarkingDogsSuck

Thu, 10/04/2012 - 10:54 | 2855774 HelluvaEngineer
HelluvaEngineer's picture

Shit, for that I'd rather stay at home, wait on my EBT refill, and chat on my Obama Phone.

Thu, 10/04/2012 - 10:40 | 2855714 pndr4495
pndr4495's picture

" It's our currency and your problem. " At that time we could still wield this idea like a sword - now though it has become a dented and increasingly precarious shield. We need a new sword as well as a new shield.

Thu, 10/04/2012 - 11:19 | 2855877 Withdrawn Sanction
Withdrawn Sanction's picture

Wasn't Connally in the front seat of JFK's limo (Nov 1963)? 

Thu, 10/04/2012 - 10:41 | 2855721 dmger14
dmger14's picture

This article sounds way to optimistic to me.  China can let its US treasury holdings mature and not roll them over, slowly exiting the dollar.  When the cost to China of holding dollars and treasuries exceeds the benefits, they will slowly exit the scene.  It's already underway...

Thu, 10/04/2012 - 10:42 | 2855727 dmger14
dmger14's picture

China is no savior, but the US is no safe haven either.  In the short-run everything is relative, but the long-term trend is down, down USA!

Thu, 10/04/2012 - 10:53 | 2855769 KidHorn
KidHorn's picture

So China gets USD when the bonds mature. What do they do with the USD?

Thu, 10/04/2012 - 11:09 | 2855824 RSBriggs
RSBriggs's picture

Buy more gold?  Buy even more of the US west of the Mississippi?  They're already heavily buying farmland in the US and doing it just as fast as they possibly can.

Thu, 10/04/2012 - 12:03 | 2856038 LawsofPhysics
LawsofPhysics's picture

correct.  Funny how they only hire chinese though.  Apparently they haven't learned about affirmative action yet.  This should get interesting.

Sat, 10/06/2012 - 15:01 | 2863144 mkkby
mkkby's picture

They'll buy as much gold and land as they can.  A lot will be left over, but that makes no difference.  They already have captive within their borders the productive capacity of every fortune 500 company, plus Europe and Japan's.  When the time comes, they won't care if some lousy fiat devalues to nothing.

The west is gutting itself, and shipping everything of value to China.  When the scale tips far enough, the US will become second rate, like England did, and China will be the strong man left standing.  All they have to do is sit back and wait.

Thu, 10/04/2012 - 10:42 | 2855722 Cognitive Dissonance
Cognitive Dissonance's picture

No...No...NO

Not the Reserve Currency!

Nooooooooooooo........

Thu, 10/04/2012 - 10:47 | 2855729 Democratic koolaid
Democratic koolaid's picture

China ia buying half of America with their imaginary currency based on the amount of sand granules in the Gobi Desert.

   (http://www.reuters.com/article/2012/05/21/us-usa-treasuries-china-idUSBRE84K11720120521)

Thu, 10/04/2012 - 10:48 | 2855749 LawsofPhysics
LawsofPhysics's picture

The elite in both countries have been on the same page for quite a while now.  All according to plan.

 

Thu, 10/04/2012 - 11:17 | 2855864 reload
reload's picture

We keep seeing that the US will get agressive immediately any state shows a desire to trade in a currency other than the USD. We all know that the end of the USD as the worlds reserve currency is the end of American ability to run Greek style defecits, who wants to be on watch when the end comes? I think it is inevitable but that does not mean it happens withought a fight.

As a side note more than one Banker has suggested to me that thay found the recent SEC aggression towards HSBC and Standard Chartered interesting because it came very shortly after the City of London announced an agreement with the Chineese to start trading the Yuan in London. Who will be the biggest traders? right, Standard and HSBC.  

Thu, 10/04/2012 - 11:24 | 2855903 Withdrawn Sanction
Withdrawn Sanction's picture

It was in 2002 that Saddam announced he was going to trade his oil for non-dollar currencies (euro as I recall).  Presto, 2003 US invades Iraq.  Purely coincidental no doubt.  Last year, Qadaffi makes rumblings about trading his oil for a gold dinar and presto...he dies of acute lead poisoning.  2 Observations, we have a line; w/3 we have a pattern.

Thu, 10/04/2012 - 10:44 | 2855734 Insideher Trading
Insideher Trading's picture

Pleeeeaaase.

China doesn't even have drinkable water

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