The body without organs
On December 25, 2011, however, headlines were ablaze with the news: China and Japan had reached an agreement to use their own currencies in trade and financial transactions. Their governments would establish a market for direct exchange of yuan and yen, avoiding the convoluted process in which a bank or firm in one country must first sell its national currency for dollars and then use them to buy the currency of the other. As part of the same agreement, Japan’s central bank agreed to hold more of its foreign currency reserves, most of which are in dollars, in yuan instead. (…)
A first thing to say is that the dollar, like the United States, isn’t going anywhere. The United States still accounts for nearly a quarter of global GDP when the output of other countries is valued at market exchange rates (which is the appropriate metric when one is concerned with international transactions). By this measure, the United States is still nearly three times the economic size of both China and Japan. Its financial markets are deep and liquid. The market in U.S. Treasury bonds—the principal instrument that foreign central banks hold as reserves—is the single largest financial market in the world. The fact that there exists a huge volume of currency transactions involving dollars allows investors to buy them in substantial quantities without driving up their price and to sell them without driving that price down. In the competition with other currencies, in other words, the dollar enjoys the advantages of incumbency.
photo { Brian Finke }
