Monday, December 26, 2011
Chinese, Japanese currency deal?
Yesterday, the Chinese and Japanese government revealed that they have created incentives in order to encourage the use of their currency in bilateral trade as opposed to U.S. dollars. China also agreed to sell bonds using Japanese banks and corporations which have formerly been closed to foreign investors. The intended purpose of this pact is “to support the growing economic and financial ties between China and Japan, the leaders of China and Japan have agreed to enhance mutual cooperation in financial markets of both countries and encourage financial transactions between the two countries,” as stated by both nations. However, by doing this, China and Japan will decrease U.S. dollar's dominance in East Asia. My question to you all is do you think the U.S. economy will drastically suffer because of this deal and if so, to what extent will this damage our economy?
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3 comments:
It makes sense that China and Japan would advocate the exchange of currencies given their proximity to each other and the sheer amount of goods that they exchange with one another. Also it would be a safer bet for the countries since they won't have to rely on the dollar's purchasing power to dictate their market in a sense. Anyways, I don't think that this currency deal will damage America's economy. Although Japan and China will refrain from using the dollar for exchanges, both countries will still be relying on America's huge business. Maybe the dollar's purchasing power may be affected by the circulation China's currency as it becomes more widely used, but I don't think this will be a huge problem. It might even prompt businesses to stay in America rather than set up base overseas. The dollar is also used in numerous transactions worldwide, meaning that it is still an important aspect in global trade.
I'm not even sure why Japan and China were using the US dollar as a medium for trading their own currencies in the first place.
In any case, this is another sign that the US dollar is not the world currency anymore. This is showing how much trust has been lost in our greenbacks. Until we fix our government spending and get our industrial economy back up, we will lose our financial integrity entirely.
As Vinh said, the US dollar is still used in business transactions around the world. It is still respected as a store of value around the world. Besides, China and Japan are major trading partners with the US and the economic connections (and US bonds they hold) ensure that American success is in their interest.
I also agree with Vinh that the amount of trade make the switch more about convenience. Chinese and Japanese companies doing business can skip a step and save money in their transactions.
This bilateral trade may be the starting point for the use of the yen and yuan as medium currencies in international trade, but they have a long way to go before competing with the US dollar.
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