Based on what I am reading and listening to for the last few months, tomorrow will mark another major step in the direction of the end of the U.S. dollar as the defacto world currency. For the last 20 years or so the the IMF’s SDR system has been the “world” money regardless of what the proponents of the Euro might be blathering about. The SDR (special drawing rights) used to be about 42% U.S. dollar, about 37% Euro, about 11% British Pound, and about 9% or 10% Japanese Yen.
The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.
Virtually all other currencies have been measured against the U.S. dollar. What that translates as, is when the U.S. dollar gets stronger the rest get weaker and so on. Having a weak dollar vi-a-vis the U.S. dollar makes a nation’s exports more attractive to the U.S. market and vice-versa. Changing the composition of the SDR changes the relative strength of the U.S. dollar and provides more options for countries to trade in another currency rather than the U.S. dollar. Now, for example, it will be feasible and even reasonable perhaps to trade in Chinese renminbi (RMB) rather than U.S. dollars for products and services which today are mostly traded in U.S. dollars
So here in Canada, where the U.S. is our hugest trading partner, this is a BIG deal. Exports amount to more than 30 percent of Canadian GDP. Canada is one of the few developed nations that are a net exporter of energy (accounts for 16 percent of total exports). Canada also exports motor vehicles and parts (16 percent), consumer goods (13 percent), metal and non-metallic mineral products (11 percent), forestry products (7.5 percent), basic and industrial chemical, plastics and rubber products (7 percent) industrial machinery (6 percent). The United States is by far the largest destination for Canadian products (75 percent of total exports), followed by European Union (7.5 percent) and China (4 percent).
Back in 1971 when Nixon decided that the U.S dollar would become the new world standard, displacing gold and the standard of choice, gold was trading at about $35.00 per ounce. Today gold is somewhere north of C$1400.00 per ounce. What we are looking at is the real destruction of the dollar as a measure of value over time.
I wonder what might happen to our GDP during the transition? Is Canada’s “special” relationship with China more important if the Chinese currency gains more prominence on the world economic stage? Will our exports drop if they become less attractive as a declining U.S. dollar brings our C$ into parity?
Here in Alberta, Canada, we have an interesting tag team of economic leaders running things.
I think I won’t bet my farm on any recovery in the near term.