Brazil leads efforts to replace dollar.
Sinking U.S. Dollar
One of the many consequences of the financial crisis in the U.S. and subsequently in the rest of the world, is the lost of credibility in the leadership of the american economy in the world. One thing that is now under scrutiny is the feasability off the US dollar as the dominant world currency. The dollar is an unstable currency. Before the crisis, the dollar was weak in comparison to the euro and other world currencies, and now is the opposite. The dollar is now strong. Stemming from the global crisis, the strong dollar forced many countries to intervene to protect their currencies and tensions created by protectionists outbreaks. Nations such as Brazil, Mexico and Argentina have been forced to devote significant resources in recent months to prevent sharp devaluation.
At the same time, Brazil led the region and is seeking to replace the dollar as reference currency in intrarregional trade. First, Brazil areed to substitute the use of U.S. dollars in its trade with Argentina. Both nations, key members of Mercosur, launched in October last year a scheme that allows the bilateral trade in the respective national currencies regardless of the dollar. The document signed by both countries defined a system of payments in local currency, and through this mechanism, importers and exporters in both countries may pay and charge for trading in Brazilian reais and Argentine pesos, without the intervention of the US dollar in the operation . The Brazilian Central Bank said in a note that the mechanism is the elimination of third currency in direct transactions between businesses. The document explained that the central banks of both countries adopted the so-called “rate SML”, to govern the conversions between the Brazilian Real and Argentine Peso.
Brazil then agreed to do the same with Uruguay in the Mercosur, which defines the first region to replace the dollar in its internal trade.
Now, Brazil seeks to do the same, but outside the Americas. On his trip to China, Lula raised the initiative in Beijing and the Chinese were studying the issue of replacing the dollar in their bilateral trade. “We do not need the dollar. Why two important countries such as China and Brazil have to use the dollar as a reference instead of their national currencies? This is absurd, and give one country the power to print currency. We need to give more value to the chinese and brasilian currencies ” Lula said last week in Caijing magazine china. China is now the number one trading partner of Brazil, moving the US into a second place.
What motivates the Brazilians to follow this path? The economic crisis and the strong dollar. The Brazilians have paid an expensive bill to protect the real during the current crisis. For example, only between September and November 2008 the giant South American country used 46,000 million U.S. dollars in this endeavor.
Something similar happened with Argentina. The argentinian central bank has also had to intervene regularly in the market to manage a gradual devaluation. The peso depreciated 2.8% so far in March and 5.9% in 2009.
More dramatic has been the devaluation of the Mexican Peso, nearly 50% since September. The central bank of that country has used 19,331 million U.S. dollars to avoid the collapse of the currency.
Another group of countries that want to follow the path of Brazil is the association ALBA, led by Venezuela and Cuba in the political arena. In the economic field , which stresses the issue of replacing the dollar is Ecuador’s President Correa, but he and the veneuzelan Cnel. Chavez suggested the creation of a Latin American currency, the sucre.
The president of Ecuador, Rafael Correa, whose country is dollarized since March 2000, has also called on its neighbors Colombia and Peru for the devaluation of their currencies by 30% and 12% respectively.
Quito since January restricts the entry of 650 products to correct its balance of payments, which resulted in protests from its partners in the Andean Community of Nations (CAN).
The thing with the “sucre” seems to be a “bridge to far”. On the contrary, the leadership of Brazil shows that the US dollar can get into trouble in the Americas.