China And Brazil Strike Deal To Ditch The US Dollar

In a time when de-dollarization news are dropping fast and furious and even Elon Musk is now jumping on a bandwagon…

… which we first defined a decade ago, not a day goes by without some modest or not so modest shift toward a world in which the US currency – fully weaponized after February 2022 for the entire world to see and fear – is no longer the world’s reserve. And today was no exception.

The deal, Beijing’s latest salvo against the almighty greenback, will enable China, the top rival to US economic hegemony, and Brazil, the biggest economy in Latin America, to conduct their massive trade which amounts to $150 billion per year, and financial transactions directly, exchanging yuan for reais and vice versa instead of going through the US dollar. In doing so China extends its bilateral, USD-exempting currency arrangements beyond countries such as Russia, Pakistan and Saudi Arabia to now include the Latin American exporting powerhouse.

“The expectation is that this will reduce costs… promote even greater bilateral trade and facilitate investment,” the Brazilian Trade and Investment Promotion Agency (ApexBrasil) said in a statement.

China is Brazil’s biggest trading partner, with a record US$150.5 billion (S$200 billion) in bilateral trade last year.

The deal, which follows a preliminary agreement in January, was announced after a high-level China-Brazil business forum in Beijing.

Brazilian President Luiz Inacio Lula da Silva was originally scheduled to attend the forum as part of a high-profile China visit, but had to postpone his trip indefinitely on Sunday after he came down with pneumonia.

The Industrial and Commercial Bank of China and Bank of Communications BBM will execute the transactions, officials said.

To be sure, we are still a long away away from the yuan replacing the USD as global reserve currency, or maybe not so far if one reads the recent reports from Zoltan Pozsar. And yet, even such foaming Bretton Woods III skeptics as Rabobank’s Michael Every is starting to realize that he may have been wrong. From his morning note today:

We showed in ‘Why Bretton Woods 3 Won’t Work’ (2022) that an anti-US BW3 bloc does not balance its trade internally by value or structure: BW3 can sell commodities to China; but unless they absorb the exports China now sends to the West, or China runs trade deficits like the US, then it can’t happen. Instead, we all just return to global mercantilism – which is happening, is inflationary, and ultimately suits the US – just not Wall Street (either in terms of mercantilism or monetary policy). When BW3 players no longer hold their official and unofficial savings in USD assets (if not Treasuries, then agencies or stocks, or property), and want to stash cash in Moscow and retire in China, then things are changing.

Alas, at the rate the current US ruling regime is destroying the world’s faith and confidence not only in the dollar but in what was once truly a superpower and is increasingly a third world banana republic – the latest news of Trump’s indictment for political reasons being the third world cherry on top – we won’t have very long to wait. ZERO HEDGE

GT Voice: De-dollarization inevitable as use of other currencies accelerates

China and Brazil have reached a deal to trade in their currencies, the AFP reported, citing the Brazilian government on Wednesday.

The deal will allow China and Brazil to carry out trade and financial transactions directly in the Chinese yuan or the Brazilian reais, instead of using the US dollar as an intermediary. “The expectation is that this will reduce costs… promote even greater bilateral trade and facilitate investment,” the Brazilian Trade and Investment Promotion Agency (ApexBrasil) said in a statement.

As China is Brazil’s biggest trading partner recording a record $150.5 billion in bilateral trade in 2022, it goes without saying that the deal comes from needs related to strong momentum of bilateral trade between the two countries.

But more importantly, from the perspective of the global monetary system, the move may mark a significant development of the trend toward de-dollarization across the world, as countries are trying to trade in non-dollar currencies and seeking to diversify their foreign exchange reserves.

With the Bretton Woods system and the petrodollar system, the dollar has evolved from a dominant payment, settlement and investment vehicle into a tool of political blackmail and coercion. By weaponizing its dollar hegemony, the US can not only arbitrarily impose unilateral sanctions on other countries, but can also harvest global wealth and export its own risks to the rest of the world through irresponsible monetary policies.

But every hegemonic currency system has its day of collapse. It is not Russia, China, India or any other country, but the US itself that sets off the inevitable trend of the end of the dollar dominance, which may be what many American strategists and economic pundits are worried about.

The sweeping US sanctions on Russia in the wake of the Russia-Ukraine crisis, which not only froze the overseas assets of Russia’s financial institutions, but also cut off the connection between the SWIFT system and most Russian banks, sent a warning to the rest of the world about risks of the US using the dollar as a tool for geopolitical gain. The more the US adopts hegemonic means to achieve its purposes, the more eager the international community will be to get rid of the excessive reliance on the dollar. Fearing the risk of being dragged into similar sanctions in the future by dollar hegemony, countries around the world have been seeking to replace the SWIFT system to avoid US monetary coercion, and the momentum has become increasingly obvious and strong.

For instance, at an official meeting of all ASEAN Finance Ministers and Central Bank Governors that kicked off on Tuesday, top of the agenda are discussions to reduce dependence on the US dollar, euro, yen, and British pound from financial transactions and move to settlements in local currencies, according to ASEAN Briefing.

In January, South African Foreign Minister Naledi Pandor said in an interview with Sputnik that the BRICS wants to find a way of bypassing the dollar to create a fairer payment system that would not be skewed toward wealthier countries.

Saudi Arabia’s finance minister Mohammed Al-Jadaan also said in January that his country is open to discussions about settling oil trade in currencies other than the US dollar.

In addition to these de-dollarization signs, India and Russia have taken a major step toward non-dollar transactions, which may be an encouragement for countries that are considering the move. Indian customers have paid for most Russian oil in non-dollar currencies, including the United Arab Emirates dirham and more recently the Russian rouble, Reuters reported in March, citing multiple oil trading and banking sources. The transactions in the last three months total the equivalent of several hundred million dollars.

Another important sign of the accelerated de-dollarization efforts is that countries including some of the US allies have reduced their holdings of US debt to diversify their foreign exchange reserves. The dollar weight in foreign exchange reserves has fallen to around 60 percent, a relatively low level over past decades, according to the IMF’s Currency Composition of Foreign Exchange Reserves data for the third quarter of 2022.

While the fact that the dollar remains the most frequently used currency in the world will not change in the foreseeable future, the trend that more and more countries will consider and pilot trade in non-dollar currencies is also unchangeable. History tells us that the decline of hegemony often begins with its currency. GT

Yuan’s two-way swing becomes norm, may strengthen to 6.5 against dollar in second half of 2023: analysts

The recent appreciation of the US dollar amid broad expectations for more interest rate hikes by US Federal Reserve, has added pressure to Chinese yuan, which depreciated by about 4 percent in February.

But experts said that there is no basis for a long-term depreciation of the yuan, which will return to a reasonable level with the steady recovery of the Chinese economy.

On Monday, the onshore yuan opened at 6.9590 against the dollar and weakened to 6.9633 as of 4 pm. After appreciating for three consecutive months, the yuan’s exchange rate weakened to 6.96 in February, while the offshore yuan weakened to 6.98 against the greenback.

The central parity rate of the yuan softened 630 basis points to 6.9572 against the dollar on Monday, according to the China Foreign Exchange Trade System.

On the same day, the US Dollar Index, which measures the US currency against six major peers, stood at 105.17, hitting a seven-week high.

“On the one hand, strong US economic data reinforced market expectations that the Fed will continue to hike rates to curb inflation. On the other hand, analysts revised gauges of China’s economic recovery after the Chinese Lunar New Year. The two factors resulted in the depreciation of the yuan,” Deng Haiqing, chief economist of AVIC Fund Management Co, told the Global Times on Monday.

But the impact of the rebound of the dollar on the yuan is limited, Deng said, noting that the yuan is expected to hover at the equilibrium level, with two-way fluctuation becoming its norm. “2023 will be a turning point for a strong dollar, as there are growing risks of a US economic recession. The Fed will probably end interest rate hikes late this year.”

“The rebound of the Chinese economy in 2023 will bolster the yuan,” Deng said.

Analysts with Ping An Bank Co projected in a note on the bank’s WeChat account that the yuan’s exchange rate may continue to fluctuate between 6.6 and 7.2 against the dollar in the first half of 2023, since there is no sign that the US Federal Reserve will suspend interest rate hikes.

However, the yuan may strengthen to 6.5 against the dollar in the second half on the back of China’s economic recovery, whereas the US economy is faced with a growing risk of recession, according to the analysts.

China strives to keep the yuan’s exchange rate basically stable, as a stronger yuan makes China’s goods more expensive in the international market, while a weaker yuan may lead to an outbound flight of domestic assets.

A securities affairs representative of hand tools maker Hangzhou Greatstar Industrial Co told the Global Times on Tuesday that a majority of the company’s overseas orders are paid in the dollar, and thus the depreciation of the yuan will increase the company’s profits in the short term.

Amid two-way fluctuation of the yuan, domestic enterprises are increasingly engaged in foreign-exchange derivatives trading to hedge market risks. Since the beginning of 2023, a dozen public Chinese companies have announced relevant moves, including BYD and Ganfeng Lithium Group.

BYD announced in a filing with the Shenzhen Stock Exchange in January that it plans to conduct foreign-exchange derivatives trading with a limit of $4.3 billion or the equivalent in other foreign currencies in order to lock in costs, and hedge and prevent risks such as wide exchange rate swings.

The People’s Bank of China, the central bank, said on Friday that the yuan’s exchange rate will remain basically stable at a reasonable and equilibrium level.
The central bank said that it will stick to a managed floating exchange rate system based on market supply and demand, which will be adjusted with reference to a basket of currencies. The market will play a decisive role in the yuan’s exchange rate, and the central bank will increase the flexibility of the yuan and stabilize expectations, according to its fourth-quarter monetary policy report.

As a tool for the management of overseas market liquidity and stabilizing expectations, the central bank issued bills worth 25 billion yuan in the Hong Kong Special Administrative Region last week.  GT