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The US dollar once again is under attack as the world’s reserve currency. Late December of last year the world’s second and third largest economies Japan and China held important discussions, coming to an agreement for opening up currency swap lines between the two countries.

Swap Lines

The Prime Minister of Japan Yoshihiko Noda and the Premier of China Wen Jianbao agreed to conduct bilateral trade. The agreement to open currency swap lines between the two currencies will also be forgoing the use of the dollar for trading in the future. The two countries have a long history in the past of not being able to agree mutually on foreign policy decisions or economic issues. However this time around they both agreed that trading between the two countries in US dollars currently still the world’s reserve currency must go.

According to the Japanese government the use of direct yen-yuan swap lines will reduce the costs and risks associated with trading and currency exchange rates. More bad news for the dollar, Japan also has signed a currency swap agreement with India. This will allow direct trade between the two countries using the Indian rupee and yen. Once again cutting the dollar out of international transactions. If this is not enough Japan will also start to purchase Chinese Renminbi bonds and hold these bonds as a reserve currency. This is history in the making, breaking away from the common global reserve currency used for decades in international trading.

Chinese Owning the Next Reserve Currency?

It is apparent the Chinese renminbi is on the rise and at the insistence of the Chinese government’s push towards global domination the current world’s reserve currency is now being directly threatened. The renminbi seems to be the only major rival to the US dollar. The IMF is forecasting the Chinese economy to exceed the American economy by 2016 if not sooner. Currently the world’s largest creditor and trading nation is China.

The United States GDP is at $15 trillion while the Chinese GDP passed just over $7.5 trillion in 2011. The Chinese economy is actually believed to be much larger than the economy in the US. The world actually is underestimating the growth in China’s economic power. The US economy is two times the size of China according to standard GDP calculations. However ten times the amount of steel is produced in China compared to the United States. Just about anything and everything US consumers purchase is made in China from cell phones to computers to luxury goods and more. China’s markets currently are several times the size of US markets.

China’s become an economic powerhouse. Sooner than many might expect the Chinese yuan could very well become the next global reserve currency, ousting the dollar that has been the world’s reserve currency for almost seven decades. The US China Economic and Security Commission recently gave the US Congress a report. Inside this report was a statement saying "it is no longer unbelievable that the RMB could at some point mount a challenge to the dollar, perhaps in the next five to ten years."

Tom Genot -

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