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Killing the Dollar

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The recent attempts by the USA to impose huge fines on foreign banks for violating US sanctions with Iran based solely on transactions in dollars is having the same impact as FATCA. The US Justice banking penalties are becoming a threat to the dollar being used in such transactions. While this is unlikely to cause the decline in the dollar as a reserve currency, for transactions, firms and banks are starting to plan to replace the US dollar as a trading currency. This growing fear of the future penalties from the US authorities is starting the process in motion whereby we will eventually move to a new international reserve currency.

The efforts of Russia and China to establish trade in their currencies is interesting but not a threat to the reserve status of the dollar. That is separate and distinct from the trading status of the dollar. One can trade in any currency, but where do you park money? That can still only be the dollar where there is a deep market (reserve). So we must separate the dollar into these two primary categories – trade and reserve. They perform two distinct functions. The Euro never got off the ground as a reserve currency and is second to even the Chinese yuan in trade. Because the Euro would not create a consolidated debt, they prevented the second prong from forming – the place to park money.

You can conduct trade in yuan, but you cannot park trillions of dollars in yuan or rubles no less euros. So you trade in whatever you like, but you convert to dollars to bank it. Major banks can switch out of dollars to for any transaction thereby avoiding US sanctions. After the transaction takes place, the parties can flip into dollars to park it. The US Justice Department will then be defeated.

Nevertheless, FATCA and the drive to punish foreign banks with billions in fines for acts outside the USA is creating the subtle shift toward a world currency at the reserve level for trade and parking. This trend is in motion always. Whatever these people can do to serve their personal interests will set in motion the ultimate drive to a new world reserve currency that cannot be based upon any single nation.