Is the greenback giving way to the redback?

J. Keith Johnson Senior Writer, The Gold Informant
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The dollar’s status as the world’s reserve currency has solidified over the past several decades, offering the U.S. a strong position in international trade, even when not directly involved. It seems, however, that this influence over world economies is beginning to wane.

Though the greenback will likely remain a world contender for years to come, what we’re seeing today points to a time in the not-too-distant future when a new currency will dominate world markets. And with China’s aggressive negotiations with nations around the world, the greenback may very well give way to the renminbi.

While BRIC nations (Brazil, Russia, India, China) have pursued bilateral trade for some time, in recent months this effort has intensified, moving away from trade in dollars. Russia and China reached an agreement just this past January, strengthening their monetary ties. Brazil and India both started trading with China in yuan this year as well.

It’s no surprise that Iran has jumped at the chance to trade with China in yuan, in light of the sanctions imposed upon it. India has agreed to trade between the rupee and rial as well. But there are a couple of surprises.

Japan, a longtime ally of the U.S. with strong economic ties, has also entered into an agreement with China to begin exchanging yuan and yen directly, distancing themselves from greenback influence. Such an agreement cuts costs and helps equalize trade between the second- and third-largest economies.

And the latest country to join the party is Chile, a small country that is making a surprising economic surge into world markets. With their free trade zones to the north and south of the country, this may very well help China establish greater trade relations with South American countries.

Problems with the euro have kept the dollar to the forefront, offering retreat from European woes. However, this can’t last forever. As Europe continues to struggle, don’t be surprised if some of the Eurozone countries seek bilateral trade agreements with China. This would especially be true of any countries that depart from the euro.

When the dust starts to settle from the current mess western economies are in, the euro may very well be no more. But the strength the dollar enjoys from such events will likely be short-lived in light of international movement away from dollars. When this realization comes to the fore, we can expect the dollar to lose value quickly.

Many think the Fed won’t let that happen. However, they can only do so much. And the greenback well is already poisoned through excessive printing and irresponsible fiscal policy. It’s not a matter of if, but when.

There could come a day in the not-too-distant future when international trade will have a new contender. Rather than trading in greenbacks, perhaps the world will get used to trade denominated in redbacks. We’re pulling for goldbacks, but certainly won’t hold our breath.

J. Keith Johnson’s Austrian and libertarian perspectives on current socioeconomic and geopolitical affairs are fueled by his insatiable desire to both discover and share the truth. A Goldco Direct affiliate, you’ll find his commentary on The Gold Informant website, as well as various Internet financial and news sites.