Tuesday, December 3, 2013

King Dollar is slowly being demoted to Prince. Should we care?

Found this graphic HERE.

It shows, in percentage terms, how much a particular currency is used to conduct international trade transactions. Countries trade with each other but most often NOT in their own currencies. Why?
""Suppose you're a textile manufacturer in Malaysia, and you want to sell your goods all across Asia and beyond. You sell those goods on credit, letting buyers pay you later for goods shipped today. But what currency should that credit be extended in? You might prefer it be denominated in Malaysian ringgit. Your buyers would prefer their home currencies--the Indonesian rupiah, the Thai baht, whatever. So you settle on something neutral--a currency that is viewed as having stable value and which each party can easily convert funds into and out of. 
For decades, that has meant you finance this trade in dollars, and only dollars. This is one important piece of America's role as issuer of the "global reserve currency," a result of the dollar functioning as the bedrock of the global financial system.""--Washington PostRMBChart
The article is about how the Chinese currency, the Remnimbi, has moved up the currency ladder as a choice medium of exchange in international transactions.  The change from last year is highlighted in GREEN.

As you can see it is still relatively minor in comparison to the use of the US Dollar.  However, the article suggests that it could become the currency of record with trades in the Asian sphere.  This would make the dollar less desirable and could hurt its long term value in the foreign exchange market:
""So China is taking concerted measures to make renminbi a more useful currency for global commerce, and it is starting to pay off in its usage for trade finance. Should America care? Does this matter for the United State's financial future? 
The dollar's status as reserve currency creates an "exorbitant privilege," as it has been called, insulating the United States from many of the vicissitudes of global financial flows and making long-term U.S. interest rates lower than they would be otherwise. It also has some costs, most notably keeping the value of the dollar higher than it would otherwise be on global currency markets, which makes U.S. exporters a bit less competitive.""

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