Russia China Dollar | Latest Burning Issue | Free PDF Download

TWO IMPORTANT GATHERINGS RECENTLY

• Chinese President Xi Jinping arrived here Tuesday for the fourth Eastern Economic Forum (EEF) at the invitation of Russian President Vladimir Putin.
• It is the first time for the Chinese head of state to attend the EEF, which was proposed by Putin in 2015.
• Xi, during his seventh trip to Russia since 2013, is scheduled to attend several bilateral and multilateral events, including his third meeting with Putin this year.
• This year’s forum, with the theme of “The Russian Far East: Expanding the Range of Possibilities,“

AGAINST THE DOLLAR

Moscow and Beijing plan to use their own national currencies more often in trade deals, Russian President Vladimir Putin told reporters on Tuesday. “The Russian and Chinese sides confirmed their interest in using national currencies more actively in reciprocal payments,” Putin said at a joint news briefing with Chinese Leader Xi Jinping after talks at the Eastern Economic Forum (EEF) in the Russian city of Vladivostok. Putin said this would “increase the stability of banks’ servicing of export and import operations while there are ongoing risks on global markets.”

 THE LOST VALUE OF CURRENCIES

The dismal performance of the Turkish lira (down 38 percent to the U.S. dollar so far this year) and the Russian rouble (down 14 percent) is strong evidence of how even relatively low-octane U.S. sanctions or the threat of harsher ones can hurt an economy.

CAN THIS IMPACT U.S DOLLAR?

NOTES

• The US dollar is not “the world’s reserve currency.” It is “the world’s major reserve currency.” Any currency can be held as a reserve currency.
• Nobody declared that each country has to hold the bulk of its foreign exchange reserves in USD, it’s just the result of individual decisions by each country.
• So of the 85.4% of the officially “allocated” reserve currencies in Q3 2017:
• US dollar: 63.5% share, down from 64.6% in Q3 2014.
• Euro: 20% share, down from 22.6% in Q3 2014.
• Yen: 4.5% share, up from 3.6% in Q3 2014.
• Pound Sterling: 4.5% share, up from 3.75% in Q3 2014

. • The Australian and Canadian dollars had a share of 1.8% and 2.0% respectively.

• The Chinese yuan – that thin red sliver in the chart below – had a share of 1.1%, up from 1.08% in the prior three quarters, and up from zero before then.
• The Swiss franc, the hair-fine black line in the chart below, has a share of 0.2%.

WHY IS U.S DOLLAR SO STRONG?

• • In 1945 a new monetary system known as Bretton Woods came into existence. Under that system, world leaders established the dollar as the global reserve currency and linked it to gold at the rate of $35 per ounce.

• The United States had the responsibility of keeping the price of gold fixed and had to adjust the supply of dollars to maintain confidence in future gold convertibility.

 THE NIXON ERA

• The Bretton Woods system was in place until persistent US balance-of-payments deficits led to foreign-held dollars exceeding the US gold stock, implying that the United States could not fulfil its obligation to redeem dollars for gold at the official price.
• So in 1971, President Richard Nixon ended the dollar’s convertibility to gold.

WOULD SUGGEST WATCHING THIS TO KNOW NIXON FOREX RESERVES

The forex are reserve assets held by a central bank in foreign currencies. It acts as buffer to be used in challenging times and used to back liabilities on their own issued currency as well as to influence monetary policy. Almost all countries in world, regardless of size of their economy, hold significant foreign exchange reserves. The components of India’s FOREX Reserves include Foreign currency assets (FCAs), Gold Reserves, Special Drawing Rights (SDRs) and RBI’s Reserve position with International Monetary Fund (IMF). FCAs constitute largest component of Indian Forex Reserves and are expressed in US dollar terms.

NOTES

China needs to gain a bigger advantage over the U.S. in global exports for the renminbi to become competitive against the dollar. According to a paper published this year by Harvard University’s Gita Gopinath and Jeremy Stein, “if the gap between Chinese and U.S. shares in world exports widens far enough, we could eventually get to a point where a renminbi-dominant equilibrium becomes inevitable. At this point, the dollar’s share in global trade and finance could potentially decline quite sharply.”

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