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China’s Dollar Exodus
China, and now Brazil, are trying to further insulate themselves from the U.S. dollar.
Rumors about replacing the U.S. dollar as the world's reserve currency continue. Read these thoughts on this and another hot subject -- China's dependence on the dollar -- by Chris Carolan, the editor of Elliott Wave International's Sunday-Tuesday-Thursday Asian-Pacific Short Term Update. (Excerpted from the May 19 APSTU; online now.)
Yes, I know the Brazilian real is not an Asian-Pacific currency. But there’s an interesting point to make with this chart.
From the newswires… May 19 (Bloomberg) -- "China and Brazil are researching how the nations can conduct trade in yuan and reals, the latest signal that developing nations are seeking to reduce their reliance on the U.S. dollar. China is seeking to promote the yuan as an international currency after signing 650 billion yuan ($95 billion) in swap agreements with Argentina, Indonesia, South Korea, Hong Kong, Malaysia and Belarus in recent months. The Chinese yuan has gained 21 percent against the U.S. currency since a dollar peg was abolished in 2005, eroding the value of exporters’ dollar- denominated profits…"
The news of the China-Brazil trade discussions are careful to note that the trade arrangement these countries are working on is not a simple currency swap, such as the one China executed with Argentina that we reported on in these pages. This current news shows that China continues to look at each and every aspect of their economic activity to reduce their use of dollars. We’ve been tracking these moves closely in APSTU, from China’s aforementioned currency swaps to their locking up of copper, gold and oil resources as diversification out of dollars.
What interests me in today’s news is that it shows how far China will go to extricate itself from dollar trade. The article doesn’t state what mix of yuan and reals will make up this trade agreement; there will have to be some amount of reals taken on by China. That means that China is indicating a willingness to hold reals instead of U.S. dollars. Look at the chart above. As recently as late 2008, the real lost 58% of its value versus the dollar in just a few weeks time as it experienced its wave (3) collapse (dollar rally on the chart.) That China would not mind holding at least some reals instead of dollars despite the tremendous volatility in the Brazilian currency just a few months ago could be a very strong indictment of the dollar.
"Or, maybe these stories are indicating it’s time to look for the dollar to bottom and start higher again? Keep in mind that the worst news comes at the bottom, and that the buck is closing in on its lows for the year. An interesting time for 'talk' about diverting away from it, no?"