Saturday, September 4, 2010

Yuan versus Dollar: the fight of the century

A self-denominated "currency capitalist", Evaldo Albuquerque, who seems to be a Brazilian, has some interesting things to say about this exchange struggle:

Why the Yuan Could Replace the Dollar By 2015
By Evaldo Albuquerque

Dear Paulo Roberto,

Do you know anyone who speaks “Esperanto?”

If not, don’t worry. I never heard of the language until my recent trip to Brazil. Over the summer, I spent a couple weeks traveling around South America on a research mission.

While I was traveling, I met with the heads of major companies and important government leaders in Latin America. As a currency guy, I wanted to know how these major players in Latin America feel about the U.S. dollar.

Of all the business leaders I met with, Maria Ramos, head of investor relations at Brazilian oil-giant Petrobras, had the most interesting opinion on the dollar.

Instead of answering right away, Ms. Ramos told me a story about Esperanto. It was designed in the 19th century to serve as a universal second language.

“Trying to come up with an alternative to the dollar today is like trying to impose Esperanto as an international language. It doesn’t work like that,” she said.

“The same way English has evolved naturally to become the international language, the dollar has become the world’s reserve currency. The dollar is the currency everyone has access to!”

Of course she’s right.

At the moment, there is no alternative to replace the dollar as a world reserve currency.

But there is something happening right now that can easily change that.

A couple of weeks ago, McDonald’s became the first foreign non-financial company to sell yuan-denominated bonds in Hong Kong. Wal-Mart has already revealed its intention to do the same. In my opinion, it’s one of the greatest developments of our time.

The Only Real Threat to the Dollar's Supremacy

Empires don’t suddenly end. There are always warning signs that can sometimes last for years leading up to an empire’s collapse.

Out-of-control debt levels have historically been a major red flag. This debt can signal an empire’s end.

Look at what happened with the Spanish Empire in the 17th century or the British Empire in the 20th. Excessive debt effectively crumbled both empires. Given its massive deficits, America may soon become another good example.

And there’s a viable threat to the dollar’s supremacy in Asia. It’s the rise of the Asian market and the internationalization of China’s currency, the yuan.

China is Planting the Seeds of a Powerful Reserve Currency

Right now, Chinese leaders are making strides toward effectively capturing the dollar’s place as a reserve currency.

In the past two months, China’s leaders allowed the yuan to trade offshore in Hong Kong. They announced opening their bond market to foreign banks.

The yuan also started trading in the domestic Forex market vs. the Malaysia’s ringgit. Soon the yuan will be trading against other currencies, including the Russian ruble and the Korean won.

Hong Kong's securities regulator also just approved a new fund of yuan-denominated fixed-income products, such as bonds and commercial paper.

Chinese financial officials are also planning to introduce “junk” bonds to provide smaller private companies with new funding channels.

As other companies follow McDonald’s and Wal-Mart’s lead in tapping into China’s bond market, the yuan will play a significant role in global commerce.

Big banks around the globe such as HSBC, BBVA, JPMorgan Chase and Citigroup are all doing road shows in Latin America to encourage the use of the yuan in trade with China.

Do you see the pattern? The development of China’s currency is here to stay.

U.S. Dollar Crisis in the Making

What does that all mean for the U.S. dollar? One word: crisis!

One important reason the U.S. dollar remains the reserve currency is the U.S. bond market. Our bond market is the most-liquid of its kind.

But a well-developed Chinese capital market will provide strong support to the yuan. And the faster this process advances, the faster the dollar will lose status in the international market.

I agree with Ms. Ramos that the U.S. dollar won’t lose its reserve status tomorrow. It may take five years or more.

But China is planting the seeds of a powerful international currency that may become this alternative to the dollar. Without any serious fiscal reform in the U.S., the buck is looking more and more like a disaster waiting to happen.

Personally, I’m not waiting. I have already diversified part of my savings into stronger foreign currencies for my family. You can buy yuan through an exchange-traded fund (NYSE: CYB). Or you can even hold yuan (aka, renminbi) in a WorldCurrency Access Deposit Account at EverBank*. Learn more here.

It’s best to do diversify your currency holdings now while the dollar is still strong to get the most for your money. I’m grabbing all the foreign currency I can at a discount and I urge you to do the same.

Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
Contributor, Currency Capitalist

P.S. I’ll be talking more about the yuan and about exotic currencies at the Offshore Advantage Academy in November. Thought you might be interested in learning more. For event details, click here.

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