The US dollar has been used as the international currency for the majority of international trade. Around 85% of foreign-exchange transactions are trades between US dollars and other currencies. As the first article below, from the Wall St Journal, states:
When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys US dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the US.
… The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.
But things are gradually changing as countries increasingly by-pass the dollar. Several countries have reached agreements with China to allow companies to exchange their currencies directly in so-called ‘currency swap‘ arrangements (see also). These include Japan, Australia, the UK, France/the eurozone, Argentina, Brazil, South Korea, Chile and Russia. But while these currency swap arrangements apply to current account transactions, there are still considerable controls of currency movements on China’s capital and financial accounts.
So what will be the implications for the USA and for China? What will be the impact on currency and bonds markets? The following articles explore the issues.
Why the Dollar’s Reign Is Near an End Wall Street Journal, Barry Eichengreen (1/3/11)
Beijing Continues Inexorable Push for Internationalisation of the Renminbi iNVEZZ, Alice Young (22/4/13)
RMB: Advance of the renminbi Emerging Markets, Elliot Wilson (4/5/13)
China’s new leaders to quicken yuan reform, but caution remains Reuters, Kevin Yao and Heng Xie (7/5/13)
Japan, China to launch direct yen-yuan trade on June 1 Reuters, Tetsushi Kajimoto (29/5/12)
China and Japan to start direct yen-yuan trade in June BBC News (29/5/12)
BOE Plans to Sign Yuan Currency Swap Deal With China Bloomberg, Fergal O’Brien & Svenja O’Donnell (22/2/13)
Bank of England, PBOC close to RMB/GBP swap agreement Emerging Markets (22/2/13)
China and Brazil sign $30bn currency swap agreement BBC News (27/3/13)
China, Brazil sign trade, currency deal before BRICS summit Reuters, Agnieszka Flak and Marina Lopes (26/3/13)
Direct trading to boost global use of yuan China Daily, Wei Tian (10/4/13)
Paris vies to be yuan hub China Daily, Li Xiang (19/4/13)
France plans currency swap line with China: paper Reuters (12/4/13)
Yuan Replaces the Dollar in China’s Dealings With France, Britain, Australia, as the War-Debt Continues to Destroy US Currency Al-Jazeerah (6/5/13)
China Takes Another Stab At The Dollar, Launches Currency Swap Line With France ZeroHedge, Tyler Durden (13/4/13)
Questions
- What are the ‘three pillars’ that have supported the dollar’s dominance?
- What is changing in the global economy to undermine this dominance?
- What will be the impact on the US government and US companies?
- What steps has China taken to ‘internationalise’ the renminbi (denominated in yuan)?
- Is the role of the euro likely to increase or decrease as an internationally held and used currency?
- What dangers are there for investors in holding all their wealth in dollar-denominated assets?
- Why may the increasing internationalisation of the euro and renminbi lead to less volatility between them and the dollar?
- How will the growing internationalisation of the euro and renminbi benefit eurozone and Chinese banks and internationally trading companies?
- What more does China need to do before the renminbi can be regarded as a truly global currency?
The post below considered the pound and now we look closer at some other international currencies and their movements. The pound has fallen, but what about the euro and the US dollar? What about the Japanese yen and the Australian and New Zealand dollars? How are the different currencies inter-related and how do they affect the various macroeconomic objectives? The following articles look at some of the recent movements in currencies. Consider these in relation to economic theory about exchange rates and government policy.
Pound plumbs five-month euro low BBC News (21/9/09)
Australian, N.Z. Dollars fall for third day as commodities drop Bloomberg (21/9/09)
Dollar ready to rise as greenback fades Brisbane Times (21/9/09)
Pound slips on Bank of England warning Times Online (21/9/09)
Canada’s dollar declines for second day on drop in commodities Bloomberg (21/9/09)
Yen firms versus European majors, hitting a 2-day high against pound Forex news (18/9/09)
Data on exchange rates can be found at:
Statistical Interactive Database – interest & exchange rates data Bank of England
Questions
- What have been the general trends in some of the main international currencies?
- The pound has fallen against the euro and the dollar, but what does this mean for the UK economy? And what about the USA and the rest of Europe?
- In the current climate, consider whether a fixed or floating exchange rate would be better for the economy.
- How do changes in exchange rates affect the government’s macroeconomic objectives?
The pound is regarded as an international currency. However, the financial crisis has caused the value of the pound to fall, reaching a four-month low against the euro in September. This recent weakening of sterling is partly the result of worries that the Lloyds Banking Group will find it difficult to meet the ‘strict criteria to leave the government’s insurance scheme for toxic banking assets’ set for it by the Financial Services Authority.
However, one of the main reasons relates to recently published figures showing UK debt (see for data). The UK’s public-sector net borrowing has now reached £16.1bn and the government’s overall debt now stands at £804.8bn: 57.5% of GDP. This represents an increase of £172bn in the past year. Over the longer term, this is unsustainable. The government could find it increasingly difficult to service this debt. This would mean that higher interest rates would have to be offered to attract people to lend to the government (e.g. through bonds and bills), but this, in turn, would further increase the cost of servicing the debt. Worries about the potential unsustainability of UK govenrment debt have weakened the pound.
But isn’t a lower exchange rate a good thing in times of recession as it gives UK-based companies a competitive advantage over companies abroad? The following articles consider UK debt and the exchange rate.
Pound plumbs five-month euro low BBC News (21/9/09)
Market data Telegraph (22/9/09)
Pound slides back against dollar and euro Guardian (21/9/09)
Pound drops as UK stocks fall for first time in seven days Bloomberg (21/9/09)
Public sector borrowing soaring BBC News (18/9/09)
Govt spending cuts ‘could help pound’ Just the Flight (21/9/09)
Pound dips to four month euro low BBC News (18/9/09)
Weak pound hits eurozone holidaymakers Compare and save (21/9/09)
Questions
- What is the relationship between public debt and the value of the pound? How do interest rates play a part?
- What is quantitative easing and has it been effective? How does it affect the exchange rate?
- What are the advantages and disadvantages of a freely floating exchange rate relative to a fixed exchange rate?
- If the UK had joined the euro, do you think the country would have fared better during the recession? Consider public debt levels: would they have been restricted? What would have happened to interest rates? What would have happened to the rate of recovery