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Will the failure of the dollar’s financial status then worsen its devaluation?

*Barron's, by Randall W. Forsyth, May 19, 2009

“New Dilemma for the Dollar

Greenback’s status challenged for trade as well as financial transactions.

CHINA ISN’T JUST TALKING ABOUT supplanting the dollar as the center of the international monetary system. It is taking concrete steps away from the greenback for both finance and trade.

The Financial Times reports China and Brazil have discussed using their own currencies for trade, a marked shift away from the use of dollars, the norm for the conduct of international trade.

There have been proposals over the years to use currencies other than the dollar for trade, most notably by the Organization of Petroleum Exporting Countries. OPEC has made noises about pricing its oil in a basket of currencies or perhaps the euro to offset the cartel’s currency losses when the greenback would take one of its periodic headers.

But nothing ever has come of those threats. And even with the introduction of the euro as the first, real potential rival, world trade continues to be conducted overwhelmingly in dollars.

The global use of dollars has been an enormous advantage to the U.S., affording the nation the ability to spend and borrow nearly without limit. As long as the rest of the world wanted and needed dollars for trade in goods and financial transactions, America could effectively just reel off greenbacks to pay its bills.

As noted here previously, the rest of the world quite simply is getting its fill of dollars. The head of the People’s Bank of China, that nation’s central bank, has called for a ‘super sovereign’ international currency that would take the place of the dollar. More recently, a Japanese official called on the U.S. to issue Treasury bonds denominated in yen, which couldn’t simply be repaid by the printing of dollars.

Now, talks between China and Brazil on setting up bilateral trade in their own currencies moves the possible supplanting of the dollar out of the financial realm.

The euro has captured a greater share of central banks’ currency reserves. And, for a time a couple of years ago, the euro became the predominant currency for issuance of global bonds.

In trade, however, the dollar had been virtually unchallenged. No other currency had sufficient size and capacity to accommodate massive imports and exports. But now other currencies and economies have grown in importance.

It is no coincidence that the U.S. has been replaced by China as Brazil’s biggest trading partner. As such those two nations see less of a need to use dollars for their bilateral trade. Moreover, China and Argentina last year entered an agreement to transact trade in their respective currencies, cutting out the dollar as an intermediary.

Not since the breakdown of the Bretton Woods system with the suspension of the dollar’s convertibility into gold at a fixed price of $35 an ounce by President Richard Nixon on Aug. 15, 1971, has the dollar’s status been so threatened.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.