Weekly Market Outlook

Dollar skyfall is coming?

Storm is coming…, get ready for wave 5 of dollar downtrend. All media are working hard to pay your attention to interest rate hike and make you forget about more important event. The  March 26, date fixed by the Chinese authorities would signal a prop up of the Yuan, its use as global currency, and probably put an end to the entrenched practice in paying for crude oil in USD.

According to official data, China surpassed the US in oil import last year, buying about 8.43 million barrels a day. The country also accumulated millions of barrels for its strategic oil reserves. After decades of dollar hegemony, the world’s largest oil buyer finally gets its own oil futures contract, the so-called Petro-Yuan is ready for “use.” China announced the beginning of trade in oil-yuan open to foreigners. Authorities hope Yuan will be able to challenge the dominance of the US dollar in international trade and simply abolish it in oil settlements.

That means Russia – as well as Iran, can get around US sanctions by trading energy in their currencies or in yuan. A new Triad of oil, yuan and gold is a win-win. There is no problem if energy providers prefer to pay in physical gold instead of the yuan. China and Russia have very large gold reserves. The first one actually produces 12% of all its world reserves. The new petro-yuan will be generously backed by gold.

At the moment, no matter how huge is the US debt, all countries need dollars to pay for oil and other commodities. But over the past few years, China has done a great job of turning the yuan into a serious rival of dollar, not only in trading oil contracts, but also as a world reserve currency. Until now, the only dollar challenger was euro. 

But what happens if oil starts to bargain in dollars less and less? The demand for the dollar will continue to decrease. Thus, the world will begin to see the US debt in a completely different light, while the opposite happens to China, although at the moment China also has a very large debt burden. I think the Chinese authorities see it. This is another reason the Chinese goal to make the yuan an important international currency has become much more important and urgent in recent years.