In recent news the Chinese Government is going to launch futures contracts beginning on March 26th of this year that will allow investors to purchase oil with Chinese Yuan currency. This is a very significant move by the Chinese government because oil can currently only be traded on the world stage in US dollars. The question that this raises is “will this lead to a collapse of the US dollar?”. In order to answer the question I think that we need to understand why this change is happening and what will be a result.
Having oil traded only in US dollars put the US in a particularly powerful position in the world. Anyone who wants to buy oil has to own their dollars. This doesn’t sound like it’s that big of a deal and you would think that if you are in another country that you could just by the oil with your respective currency but since oil is a commodity it is traded on the futures exchange. The futures exchange allows investors and purchasers of oil to secure prices for future delivery of oil. This benefits the oil producers by guaranteeing them income for the oil that they drill and it guarantees the purchaser in that they will have oil delivered to them at a future date at an agreed upon price. Individuals buy oil by the gallon or liter whereas countries buy it by the barrel.
Being in in this position of power the US dollar could never really sell off completely because people had to own it in order to buy oil. This was the reason behind the dollar being the world reserve currency. Lately the US dollar has been losing value relative to other currencies but the decline has thus far been orderly and part of an ongoing back and forth monetary policy of lowering of a country’s currency value to help in trade.
The US has a very severe debt problem as many countries do and has led to a lot of diversification out of the dollar over the years which contributed to this move by the Chinese. But, I think that there is another very important reason that the move is being made. As everyone knows the US is very quick to impose their will on other countries and has weaponized the petro dollar though the use of sanctions. As it stands if the US imposes sanctions on a country they also freeze their US bank accounts, not very nice. Or, if another sovereign country loses a court case in the US they can have their accounts liquidated. It makes a lot of sense to have an alternative. Everyone hoping to buy oil has to do it in dollars so they have to have banking interests in the US. This has been going on since 1974 when the petro dollar started. The adoption of the Yuan based futures contract effectively circumvents US sanctions by allowing countries to opt out of holding dollars.
So, will the petro Yuan cause a collapse of the US dollar? I don’t think so, at least not right away. Oil will still be traded in US dollars, it will just be traded in Yuan as well. Will this cause the value of the US dollar to decline further? Absolutely, this move may facilitate the decline in the US dollar over time but there is still interest in holding dollars and the Yuan itself is actually somewhat pegged to the dollar. What this move simply does is creates a dollar alternative and a hedge against US political risk.
Image source: zerohedge.com
Good explanation. Just the information i was looking for.
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@read3986 the petroyuan plus the trade deficit, plus the bond & stock market bubble, plus the huge unpayable debt will definitelly crash the dollar...
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You got a 6.81% upvote from @adriatik courtesy of @read3986!
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You got a 6.26% upvote from @ipromote courtesy of @read3986!
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You got a 3.83% upvote from @bid4joy courtesy of @read3986!
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