China and Brazil Ditch the U.S. Dollar: What It Means for the Future of Global Trade and the U.S. Economy
The most recent relations among global superpowers seem to show that people (countries) are tag-teaming against the United States. To back up the claim, a significant move away from the U.S. dollar took place as China and Brazil agreed to conduct their trade and financial transactions using their own currencies. Simply put, the countries will trade/exchange using the Yuan and Reais, instead of going through the U.S. dollar. This deal is part of China's efforts to promote the use of its own currency, the Yuan, and to reduce its reliance on the U.S. dollar.
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As China continues to be Brazil's biggest trading partner, with two-way trade hitting over $150Bn last year, this deal is expected to reduce costs, promote greater bilateral trade, and facilitate investment. China has also made similar currency deals with countries like Russia and Pakistan.
However, the shift away from the USD could have a significant impact on the overall strength of the currency. If more countries start to trade in their own currencies, it could reduce the demand for the dollar, leading to a weaker dollar. In all honesty, I believe the dollar is already relatively weak due to our massive spats of printing within the last 3-4 years. But, I digress. The reduction of value, in turn, could have consequences for the U.S. economy and its role as a global economic power.
Central banks hold around 60% of their reserves in USD, and around 80% of global foreign exchange transactions are in USD. The U.S. dollar became the world reserve currency after WW1 when the U.S. emerged as the world's leading economic power. In 1944, following the Bretton Woods Agreement, 44 nations agreed to adopt the USD as an official reserve currency.
Despite the major shift, it's unlikely that the USD loses its status as the world reserve currency for the foreseeable future. Well, at least we think so. The USD is a stable and reliable currency when it isn't being fiddled with in the most absurd ways possible. It's widely accepted around the world as well. However, as more countries look to promote the use of their own currencies and reduce their reliance on the USD, the global economic landscape could start to shift.
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One of the discussed concerns with China's efforts to promote the use of the Yuan is its lack of transparency in its central banking system. Some countries could be hesitant to adopt the Yuan as a reserve currency, as they may not trust China's economic policies and financial stability. It would definitely make for an interesting discussion given China has the largest economy by Purchasing Power Parity (since 2016) and the second largest economy by Nominal GDP.
The agreement between China and Brazil to trade in their own currencies, and to ditch the USD, is a significant step towards promoting the use of alternative reserve currencies. While it is unlikely to have an immediate impact on the strength of the U.S. dollar, it could have consequences for the global economic landscape in the long term. However, concerns over transparency in China's central banking system may hinder the adoption of the Yuan as a reserve currency going forward...
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