China and Brazil have agreed to trade in their own currencies, abandoning the U.S. dollar. If more countries start trading in their own currencies, it could reduce the demand for dollars. This could lead to a weaker dollar.
Here's all you need to know:
China and Brazil have agreed to conduct their trade and financial transactions using their own currencies, abandoning the U.S. dollar as an intermediary.
They will exchange yuan for reais, and viceversa, instead of going through the U.S. dollar. This is part of China's efforts to reduce its dependence on the U.S. dollar as the world's main reserve currency and promote the use of its own currency, the yuan.
China is Brazil's largest trading partner, with bilateral trade exceeding $150 billion last year. The agreement is expected to reduce costs, promote greater bilateral trade and facilitate investment.
China has similar currency agreements with Russia and Pakistan.
My personal opinion is that China does not have a transparent central banking system. Central banks hold 60% of their reserves in US dollars and 80% of global currency transactions are in USD.
The US dollar is the world's reserve currency, which means it is the currency most countries use to hold foreign exchange reserves and settle international transactions.
The U.S. dollar became the world's reserve currency after World War II, when the United States emerged as the world's leading economic power.
In 1944, following the Bretton Woods Agreement, 44 nations agreed to adopt the U.S. dollar as the official reserve currency.
The U.S. dollar is likely to remain the world's reserve currency for the foreseeable future, but this status will weaken over time. If the Federal Reserve eventually decides to lower rates again to combat the impending financial crisis, confidence in the dollar could plummet as interest rates continue to lag inflation.
