For several years, there has been a question of how long the US dollar will remain the global currency of choice. The likelihood is very low that countries will replace the good old greenback with something else, but it is highly likely the dollar will get additional company as other currencies are accepted more readily in terms of trade.
The latest move has the European Central Bank arranging a currency swap with the Chinese. This swap line of about $57 billion will be the third largest China has been involved in, behind only the swap lines arranged in Hong Kong and South Korea. It is not seen as a real substitute for the way that trade is handled right now, but it provides a kind of currency backstop and continues to move the renminbi forward as a true global currency.
The chief motivation for the swap agreement is that there has been a dramatic increase in bilateral trade between Europe, mostly Germany, and China. As downturns affected EU member nations, the United States and Eastern Europe, German companies needed to look elsewhere, such as China and other Asian markets, for growth. China is now the euro zone’s second biggest trading partner—behind only the zone itself.
The day of the dollar is anything but over, as the vast majority of global transactions continues to be handled with the greenback. There is no evidence that most nations have any interest at all in trying to trade with Chinese currency. If anything, the dollar has gained strength as a global currency given the travails of the euro. The point is that China and other nations want options that can make trade and investment easier.
- Chris Kuehl, PhD, Armada Corporate Intelligence