Attempts to threaten dollar's dominance could irk U.S. - Don't Step On The Tail Of The Tiger

Attempts to threaten dollar's dominance could irk U.S.

In this photo taken Tuesday, April 5, 2011, a clerk holds up a bundle of 100 yuan notes at a bank in Beijing, China. (AP Photo)


Prime Minister Yoshihiko Noda visited China at the end of last year to meet with his Chinese counterpart, Wen Jiabao. In their meeting, the two premiers agreed to expand direct transactions between the Japanese yen and the Chinese yuan, which has drawn particular attention.

The international financial world is dominated by the U.S. dollar. In order to exchange the yen for the yuan, the yen needs to be exchanged for the U.S. dollar first and then changed for the yuan.

However, Noda and Wen agreed to directly exchange the Japanese and Chinese currencies without the intervention of the dollar. In simple terms, Japan and China agreed to eliminate the dollar's influence on their economic relations.

The accord allows Japanese companies to build factories in China using yuan. It also allows the Japan Bank for International Cooperation to issue bonds in yuan. The two countries have also agreed to buy each other's government bonds. It is widely known that China has been cutting into the dollar's dominance in the world.

China has concluded similar agreements with Pakistan, Uzbekistan, South Korea and many other countries. However, the yen has far more influence on the international financial world than the currencies of these countries, as the Japanese currency is ranked fourth in terms of currency reserves. Therefore, the latest agreement between Japan and China undoubtedly represents a major step forward in Beijing's strategy of driving a wedge into the dollar's dominance in international financial markets.

Japan pursued a dream of making all of Asia a yen zone in the 1980s when it was still economically strong. Japan made certain achievements in its efforts toward that end as about half of Japan's exports are made in yen, but Japan has no capability to go further. Even if Japan attempts to buy oil from Saudi Arabia in yen, the exporter will never accept the currency. Japan's attempt to set up an Asian monetary fund, with the yen as its core, to prepare for a financial crisis failed after it came under harsh criticism from the United States.

In that sense, the latest Japan-China accord appears significant. The Japanese government has begun an interesting game.

Japan has no intention of driving a wedge into the U.S. currency's dominance in the world. Still, expansion of the yen's role in the international market will help increase business opportunities for Japan, and it could be quite significant in making the United States see Japan as a major economic power in Asia.
A money trader works in front of the yen-dollar foreign exchange rate at a money market brokerage firm in Tokyo, Japan, Thursday, Aug. 4, 2011. (AP Photo/Shuji Kajiyama)


However, the United States will not just sit idle when the dollar's dominance is threatened. One theory has it that the United States attacked Iraq in 2003 because then Iraqi President Saddam Hussein switched the currency in which the country traded in oil from the dollar to the euro. In other words, the real purpose of the U.S. war against Iraq was to defend the dollar as the key currency in the world.

Iran has also switched the currency in its oil transactions to the euro, threatening the dollar's dominance. Rumors are spreading that this is why the country is likely to be Washington's next target.

However, such groundless rumors should not be taken seriously. Still, it is true that the United States is sensitive about the dollar's status as the key currency in the world. Japan as well as other countries should take care not to step on the tail of the tiger. (By Michio Ushioda, Expert Senior Writer)



http://mdn.mainichi.jp/perspectives/news/20120203p2a00m0na003000c.html

China has been rumbling about this for about 18-24 months, Now we here about them (China) and Iran getting close, but remember China needs the oil to continue their raise in manufacturing.