Friday, April 13, 2012

Yuan Soon Ready For Global Settlement

The sun is setting on the U.S. dollar's position as world reserve currency.  China is building a currency clearance system that will probably end up matching the capabilities of the US-backed SWIFT system.  Control of SWIFT gives the West leverage over rogue states like Iran.  Shutting bad states out of the world's main interbank payments system gives those renegades the painful options of starving, bartering, surrendering, or threatening war.

China's yuan trading system is more than another jab at the dollar's increasingly fragile leadership.  It is an alternative diplomatic structure that can give China leverage over emerging economies where the US also competes for political influence.  Once China has this system in place it will no longer need to worry about parrying US diplomatic pressure on behalf of its trading partners.

Full disclosure:  Long FXI with covered calls.