In what may mark the beginning of a historic shift, Australia appears ready to bypass the U.S. dollar as the world’s reserve currency and allow for the direct convertibility of the Australian dollar into the Chinese yuan.
“Reserve currency” is the term used to describe a currency that many governments hold significant amounts of in foreign exchange reserves.
By directly converting its currency into Chinese currency, Australia’s businesses will be able to cut costs and the inconvenience of changing foreign-currency earnings into dollars, thereby encouraging and accelerating even more business with China.
Today, Australia is the fifth-largest source of Chinese imports, notes Tyler Durden of Zero Hedge:
Why is this so very critical? For the simple reason that the free lunch the US has enjoyed ever since the advent of the US dollar as world reserve currency, may be coming to an end as other, more aggressive alternatives – both fiat, and hard-asset based – to the USD appear. And since there is no such thing as a free lunch, all the deferred pain the US Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future.
In a Wall Street Journal article last month titled “Why the Dollar’s Reign Is Near An End,” University of California, Berkeley economics professor Barry Eichengreen said the erosion of the U.S. dollar as the world’s reserve currency will make life easier for European and Chinese banks and companies.
“The same will be true of companies in other countries that do most of their business with China or Europe,” wrote Eichengreen. “It will be a considerable convenience–and competitive advantage–for them to be able to do that business in yuan or euros rather than having to go through the dollar.”
Eichengreen added: “In this new monetary world, moreover, the U.S. government will not be able to finance its budget deficits so cheaply, since there will no longer be as big an appetite for U.S. Treasury securities on the part of foreign central banks.”
On Monday, China’s currency, the yuan, hit a record high against the U.S. dollar.