The Other Currency War
by John Rubino on March 29, 2013
Most of the recent “currency war” talk refers to countries trying to lower the value of their currencies to gain a trade advantage and/or make their debts more manageable. But this war has another theater, where a weaker currency is not the main goal.
Start with the premise that when a country conducts most of its trade in another currency, it cedes power to the “reserve currency” issuer. Right now that’s the US. Because oil and most other things are traded in dollars, the world’s central banks have to hold a lot of dollars as reserves. The resulting nearly-infinite global demand for dollars allows Washington to borrow as much as it wants, and to govern without having to make hard spending and tax choices that other countries have to live with. It also allows the US to fund a military that dwarfs everyone else’s and to throw its weight around in ways far out of proportion to its population or moral authority. If you’re a would-be superpower like China, Russia, India or Brazil, “dollar hegemony” is in your way.
So there’s an advantage to be gained by cutting the dollar out of bi-lateral trade in favor of one’s own currency. Here’s how China and Brazil are playing it:
China, Brazil sign trade, currency deal ahead of BRICS summit
BRICS members China and Brazil agreed on Tuesday to trade in their own currencies the equivalent of up to $30 billion per year, moving to take almost half of their trade exchanges out of the U.S. dollar zone.
The agreement, due to last three years and signed hours before the start of a BRICS summit in Durban, South Africa, marked a step by the two largest economies of the emerging powers group to make real changes to global trade flows long dominated by the United States and Europe.
“Our interest is not to establish new relations with China, but to expand relations to be used in the case of turbulence in financial markets,” Brazilian Central Bank Governor Alexandre Tombini told reporters after the signing.
Trade between the two countries totaled around $75 billion in 2012. Brazilian officials have said they hope to have the trade and currency deal operating in the second half of 2013.
At the summit in Durban, the fifth held by the group since 2009, Brazil, Russia, India, China and South Africa are widely expected to endorse plans to create a joint foreign exchange reserves pool and an infrastructure bank. They are also due to discuss trade and investment relations with Africa.
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