Monday, April 1, 2013

China and Australia Dump the U.S. Dollar

Following the recent announcement that Brazil and China would trade using their respective currencies instead of the U.S. dollar, Australia's announcement that it is following suit is yet another blow to the U.S. dollar's status as a reserve currency. In fact, we may see a preference cascade, with the concomitant drop in the value of the dollar.

It will be interesting to see how China is able to handle this, though. By moving away from using the dollar, and directly trading in the Yuan, the Chinese risk both a rise in the value of the Yuan, which will make Chinese goods more expensive and reduce exports, while presenting an opportunity for wealth to flow out of China more easily. If the Chinese discover that they can invest in something other than empty apartment buildings, the real estate bubble in China could quickly collapse.

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