Another Blow to the US Dollar

Thanks to a reader (John C.) who has a knack for ferreting out stories of importance that sometimes seem to miss the financial press here in the US, comes a story dealing with a potential move by Australian mining companies to do away with the US Dollar in their trade dealings with China and transact their business directly in Yuan or Renminbi.

The fact that we are seeing stories such as this appearing with increasing frequency is suggestive that events surrounding the US Dollar' demise could begin accelerating. Things such as this would have been most unlikely were the US Dollar a stable store of value but the Fed's Quantitative Easing policies along with an out-of-control federal government spending binge have now begun to move towards their inevitable conclusion.

More and more nations and businesses are asking themselves why bother with basing contracts and sales agreements in US Dollar related terms which could end up costing them a decent portion of their profits when currency movements are accounted for. Why not just cut out the middle of the transaction involving the currency exchange and conduct the business directly in the native currency of the country with which you are doing business. It saves money and time while eliminating an element of risk which must be considered when attempting to formulate a risk management plan that accounts for currency movements and that therefore must be hedged against.


It was not that long ago that China and Russia inked a deal cutting out the Dollar in trade between both nations. Remember that? It was a big deal but did not really make too many waves here in the US financial press. A couple of years ago China and Argentina agreed to sort of trial run to conduct trade between themselves directly bypassing the US Dollar as well. As China's influence continues to grow in Latin America, we will see more of this sort of thing.

The biggest obstacle to this has been the limited convertibility of the Chinese yuan - outside of China there is not that much one can do with yuan - but that seems to be changing as China is working diligently along this line to increase the importance of its currency in international trade. Hong Kong is where the focus has been to set up an offshore yuan trading hub to facilitate this. My view is that this process will be irreversible and will gain momentum faster than many here in the US appreciate.

John has also reminded me of recent chatter concerning India settling oil purchases with Iran in gold.

What we are seeing here is the beginning of a trend, one which I believe is going to be gaining momentum as we proceed further in this decade.

Miners can save 10pc from yuan deals: ANZ

• Michael Sainsbury, China correspondent
• From: The Australian
• February 23, 2011 12:00AM

AUSTRALIAN companies may reap savings of up to 10 per cent on export contracts as they consider a move to settling deals in China's currency as part of a global trend that will see the yuan emerge as a major international currency in the next decade.

Trade in the yuan has exploded in the past 12 months since the Chinese government expanded a trial settlement scheme, with Hong Kong emerging as the international hub for trade in the currency.
"Trade in RMB (renminbi, as the yuan is also called) gives Chinese exporters more bargaining power as they won't have to be worrying about US dollar currency risks; they do build in margin for the rise in RMB and most of their expenditure domestically is in RMB," ANZ Asia-Pacific chief Alex Thursby said.
Next month, Norman Chan, head of Hong Kong's Monetary Authority -- the city's central bank and finance regulator -- will visit Australia to talk up the scheme. Mr Thursby said the de-risking of contracts for Australian miners by settling them in yuan could save them 5-10 per cent after removing a double exchange changeover fee -- yuan to US dollar, US dollar to Australian dollar.

You can read the entire story here:
http://www.theaustralian.com.au/business/miners-can-save-10pc-from-yuan-deals-anz/story-e6frg8zx-1226010357770