Trend in International Trade Could Hurt the Dollar
As it stands, a huge portion of global trade is done in the U.S. dollar. That’s one of the only reasons the dollar remains the dominant currency, and why commodities like oil are, for the most part, priced in U.S. dollars.
This could be changing soon, as another currency is gaining popularity in world trade. I’m talking about the Chinese yuan, also known as the renminbi (RMB).
Major banks like Citigroup Inc (NYSE:C) and HSBC Holdings plc (ADR) (NYSE:HSBC) are increasing the number of certain jobs and locations so they can offer more yuan to their customers while providing capital market and hedging solutions that are denominated in that currency.
Why? Because China is making strides in increasing its global trade, so the use of the yuan is naturally rising. (Source: “Global banks sharpen focus on yuan offerings as China’s Silk Road fuels demand,” Reuters, September 26, 2017.)
Venezuela is now publishing oil and fuel prices in yuan. In a bulletin, the country’s Oil Ministry said, “This format is the result of the announcement made on Sept 7 by the president … that Venezuela will implement new strategies to free the country from the tyranny of the dollar.” (Source: “Venezuela publishes oil prices in Chinese currency to shun U.S. dollar,” Reuters, September 15, 2017.)
While what Venezuela did could be a politically motivated move, we can’t overlook the fact that the country is one of the world’s major oil producers, so this will have an impact.
Will other countries start to price their commodities in yuan too? I believe they will. China has a massive population and it buys goods throughout the global economy. Hence, why I believe that other countries will follow Venezuela’s lead.
The day we start to see other commodities priced in yuan could be the day we see the end of the U.S. dollar.
The U.S. dollar losing its value relative to other currencies is going to have severe consequences. Year-to-date, the dollar has already declined about 10% when compared to other major currencies.
I don’t foresee the U.S. dollar collapsing overnight. I expect its decline will be slow and gradual. But, eventually there will be a time when selling escalates and the dollar sees a rigorous sell-off.
The only winner I see in all this is gold. The yellow metal has always been a solid hedge against currency devaluation.