Swap Agreements Threaten U.S. Dollar Dominance

Includes: UDN, USDU, UUP
by: WWS Swiss Financial Consulting SA

China and Russia have made a swap agreement.

There are several other swap agreements.

Many central banks have increased their purchases of gold.

The dominance of the US dollar is threatened.

Investors should be aware of this development.

China and Russia have signed a swap agreement that allows for trade in their respective currencies. This will make it possible for them to avoid using US dollars in transactions. This is not the first swap agreement, but good relations between Putin and Xi are the basis for an expansion in trade between the two countries. In consideration of the present trade war of China with the US, it makes sense for the Chinese to seek an expansion of trade with the Russians.

In fact there are several other swap agreements between other countries that make it possible to avoid having to resort to employing US dollars in international transactions. Germany, France and Britain have resorting to implementing an SVP to enable trade with Iran in an effort to circumvent American sanctions on Iran. The creation of Instex resulted in a reaction from the US threatening exclusion from US financial systems for anyone that traded with Iran.

India and the UAE have agreed on swap arrangements in each other`s currency. This will make it possible for them to avoid having to use US dollars in international transactions.

China recently signed swap agreements with Japan so as to make it possible for them to trade in their own currencies. This has as a result that they will be able to avoid using US dollars for international trade transactions with each other.

Even the Philippines has followed the trend and signed a swap agreement with Japan. Relations between the two countries have been reinforced by recent trade deals.

India and Japan have swap agreements.

Serbia and the Philippines have been purchasing more gold recently, which could indicate that they anticipate a change in the organization of international foreign exchange. In fact the central banks of many countries have been acquiring gold in order to bolster their foreign exchange reserves.

The reason why so many countries have made swap agreements so as to be able to avoid dealing with US dollars is because the US has been weaponizing the currency. Besides China, Cuba, Iran, North Korea, Russia and Venezuela, all of which have their reasons for avoiding US dollars, it is now clear that there is a movement away from the US dollar in international transactions. The establishment of the Shanghai oil futures exchange makes it possible to trade oil in yuan, and makes for competition with New York and London.

These developments signal a tread away from the US dollar in international transactions. At the moment the US dollar is still the dominant currency in central bank reserves and in Forex markets, where the dollar figures in about 85% of all transactions. This may change in the future. It will most likely be a gradual change and not something that changes completely in a short span of time. But the threat is there.

What investors should do to anticipate developments in forex markets is to be aware of the changes that are to come. Given that the US dollar still has a high valuation in Forex markets, it is possible to buy foreign currency cheaply.

It would therefore be a reasonable strategy to diversify into foreign currencies in anticipation of a fall in the value of the US currency. Suggestions to that effect will be the subject of another article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.