China, in collusion with Australia, is preparing to deal a blow to the sluggish and fragile U.S. economy. China is preparing to enable direct currency exchanges with Australia, in what many believe is a pilot program to see if the U.S. dollar can be ousted as the world’s reserve currency.
LOS ANGELES, CA (Catholic Online) – The Chinese and Australian move to oust the U.S. dollar as the world’s reserve currency gained full steam over the weekend with Australian officials agreeing to start making direct currency exchanges with China.
This will ultimately harm the U.S. economy, although only slightly in the short term. In the long run, as other countries join Australia, it could unseat the U.S. dollar as the world’s reserve currency.
The U.S. dollar has been the world’s reserve currency since the end of World War II, when it was made such by deliberate international agreement. As reserve currency, most international exchanges are made with the U.S. dollar. This requires foreign traders to convert their money to U.S. dollars to enter the market. When cashing in their profits to spend at home, traders must usually exchange their dollars back into their native currency.
Each exchange costs a fee, which is usually passed along to the final consumer in the form of higher prices. American consumers normally enjoy a break on prices because U.S. merchants don’t have to exchange their currencies, meaning the cost of doing business is lower.
Large countries tend to get better exchange rates too.
However, China and Australia are major trading partners, and cutting the U.S. dollar out of their deals means less money for the United States. Furthermore, it could establish a long-desired trend to oust the dollar as the world’s reserve currency.
It is uncertain which currency could replace the dollar, if any. Certainly the euro is a contender, but Eurozone instability continues to block significant progress for the euro. The Yuan could also be a contender, given the increasing global presence and economic dominance of China.
It could also happen that world economies dispense entirely with the notion of a reserve currency and all exchanges start happening directly. However, such a system would be much more complex and powerhouse nations will compete to place their currency as the international reserve.
Australian and Chinese businesses stand to save a lot of money over the years by abandoning the U.S. dollar. If both economies benefit and grow as a result, China could then invite others to trade directly with the Yuan instead of the dollar, which would increase China’s economic vitality while reducing that of the United States.
While consumers may not see much change in the near-term, major traders and currency speculators have a lot to watch as two of the world’s largest economies start dumping the U.S. dollar once-and-for -all.