CURRENCY WAR: CHINA PUSHES YUAN TO FREEZE OUT THE US

The Slog -

Beijing’s new moves bring the US Debt cataclysm
nearer.

America’s reserve currency status may be more threatened than people realise, but lack of faith in the Dollar is not driven by sideshows about debt ceilings. It is dictated by the growing global belief that, as a trading nation built on ingenuity, the US has lost the plot. The Slog analyses why this is.

Last June, Britain and China moved to arrange a semi-permanent currency swap between Sterling and the Yuan. It was presented as a ‘trade facilitator’ (which indeed it is) but passed largely unnoticed. The key thing about it was, like an earlier arrangement with the European Central Bank, it cut the Dollar out of a major trading exchange.

Three days ago, Beijing tied up a much bigger deal with Mario Draghi’s ECB: China and the European Central Bank have signed a currency swap agreement worth 350bn yuan with the EU’s central bank. It will last for three years and is easily renewable.

The previous day, the Republican Proposal had been to lift The US Debt Ceiling for six weeks. A compromise….as The Slog and many others predicted. But viewed in the light of the China Bank/ECB deal, the announcement does smack of the crew playing football with bits of iceberg on the deck of the Titanic.

For decades, the Beijing politburo has kept a tight grip on the yuan, pegging the currency to the U.S. dollar. Now – alongside its policy of avoiding any further US National Debt risk – the Chinese are effectively freezing America out of more and more of the deals that make the Dollar a Reserve Currency. This trend is only going to go one way.

“It’s a way of promoting European and Chinese trade, but not doing it with the U.S. dollar,” said Kathleen Brooks, a research director at FOREX.com, “It’s a bit like cutting out the middleman – all of a sudden there’s potentially no U.S. dollar risk.”

A couple of weeks back, I pointed out that movements in the Dollar’s value suggested a more strategic investment strategy from some investors, rather than merely tactical trading. This is what I wrote on September 28th:

‘Raped by the Fed’s bullying market masters and pummelled by the cost of administering an expansive superstate, the Dollar is now being sold long, not short: the movers are beginning to look for an alternative to it. No longer gambling on the Buck, investors are turning away from it….[and]….the demise of Detroit shows how technical and marketing leadership have been lost to the greed of bourses, and the ever-more myopic number-crunching of the short-termist accountant….analyse what [the US is] based on – military power, natural energy resources, technical leadership, globalised export marketing, democratic values, financial power in general, and the Dollar in particular – and one quickly sees that cracks in the edifice are very obvious.’

As long ago as 2010, I wrote this:

‘Look behind the headlines at the numbers, and it becomes clear that people are deserting the Dollar….QE2 is about to slide down the slipway….The Slog’s view remains that this form of stimulation is more likely to go down the toilet than the slipway. The sheer amount really required to make a difference is beyond the US Government now – and, given the importance of Sino-American trade and debt relations, diplomatically impossible….another bout of QE will kill the American Dollar.’

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