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Countries Phasing Out the US Dollar

The dollar is perceived as a "risky asset", therefore many countries have started to avoid it. But it's not just the economic risk that pushes them to avoid the "greenback". There are plenty of political factors involved as well.

More and more countries are bypassing the US dollar in trade with each other. Although in the great international World, the dollar still acts like the reserve currency of the World, trade often goes down to bilateral activity. And in bilateral trade, more and more have started phasing the US currency out.

This has been happening at an increasing rate since the new millennium had started, but the process has only been accelerated by the outbreak of the 2008 crisis.

The US dollar's status as the World's reserve currency is severely threatened and as years go by, you will see the menace intensify and the dollar avoidance becoming more and more wide-spread.

Part of the reason why the US dollar is the World's reserve currency is the international system behind oil trade. The less the US currency is being used in petroleum trade, the weaker it will become.

Basically the dollar avoidance happens in two ways: some countries ditch the petrodollar system (by substituting the US dollar in the oil trade), others are running away directly from the dollar as currency (and are either buying gold or creating other currency reserves).

Examples of dollar avoidance generally occur in the following forms (but there are vastly other manifestations of the phenomenon as well):

 Avoidance of the petrodollar system by purchasing/selling oil and/or related products in exchange for other currencies or, through barter

 Selling US dollars from the forex reserves in order to build up other reserves (for instance: building up gold reserves by purchasing gold with US dollars)

 US dollar-avoiding bilateral trade agreements - countries agree to avoid the dollar in trade with each other (they naturally tend to favor their own currencies)

 Phasing out dollar-denominated assets - eventually the US treasuries and bonds will become less desirable (less bought and those already owning them will try to sell them)

Several concrete dollar-ditching measures undertaken by certain countries are presented below...

Iran Has Exited the Petrodollar System

Iran has ditched the US dollar by selling oil for euros in the first phase, then later on they swapped to selling even for gold.

Political and economic reasons are behind Iran's decision to exit the petrodollar system. Trade will follow through the use of other currencies, precious metals and through barter.

India is buying oil from Iran in exchange for gold (referential source here) and so is China (see reference).

Here's a Casey Research article referring to the "demise of the petrodollar". Iran indeed, has made a big step towards threatening the status of the US dollar through undermining the petrodollar system. The reasons are obviously of political nature.

Major buyers of Iranian petroleum (especially China, India, Russia and Turkey) and derived products often pay in solid gold, rubles, yuan or other means.

Iran Has Totally Eliminated the Dollar
and the Euro From Foreign Trade

In early 2013 Iran decided to eliminate both the dollar and the euro from any foreign trade operation. This is more than just escaping the petrodollar system, because it impacts trade in general.

This has reduced the area of influence of the two major currencies.

Of course, Iran has a small influence, but a domino-effect is already occurring. More and more countries are phasing the dollar out.

After leaving the petrodollar system, Iran's biggest weapon against the US amid political and economic sanctions was to totally eliminate the US dollar from foreign trade. Of course, this can backfire (it will be more difficult to Iran to purchase products from other countries).

Venezuelan-Russian Bilateral Dollar-ditching Agreement

The two countries have agreed to trade in Venezuelan bolívars and Russian rubles (reference here).

This extends the activity far further than just oil trade. But again, the dollar's area of influence has contracted.

Overall, the dollar's influence will contract further as more and more countries proceed this way.

It is less likely that Russia will buy much oil from Venezuela - the latter being far away and, Russia being the biggest oil-producing nation in the World (Venezuela is 9th). The trade agreement will most likely have effect on other areas.

Australia and China Eliminate the US Dollar
From Trade Through a Bilateral Trade Agreement

In March 2013, Australia and China have agreed to erase the dollar as a means for payment in their bilateral trade. this article by the International Business Times illustrates the case in short phrases.

Literally, they enabled direct currency convertibility and will trade in their own currencies: Australian dollars and Chinese yuan.

Because Australia is a major exporter of commodities and China is a major industrial products exporter, this is a huge blow to the US dollar's status.

It is estimated that the exchange between the two countries exceeds 30 billion US $ per year.

China and Brazil Agree Direct Currency Trade

Previously the matter was dealt with in this article by Prime Values.

Brazil is a major commodity exporter and China is the production engine of the World.

In order to sustain its economy, China will require tremendous amounts of commodities and countries like Brazil can provide the required fuels, materials.

This agreement between the World's biggest producer and one of the World's biggest producers of commodities will severely undermine the US dollar's status as the reserve currency of the World.

China and Japan Started Trading in Renminbi and Yen

The trade between the two countries is estimated to be worth around 350 billion US $, about 11-12 times the trade between China and Australia.

According to this UPI news release, China considers that the dollar's influence on their trade is too large.

This agreement (as many others) will weaken the dollar and strengthen the two currencies (in this case: the yuan and the yen).

China and Germany Intensify Trade
in Their Own Currencies

Although they're have not excluded the US dollar from bilateral trade, Germany and China are intensifying the use of euros and yuans.

If China and Germany choose to totally exclude the dollar from bilateral trade, then this will have a similarly powerful negative influence on the "greenback" as the Japanese-Chinese pact.

China Stops Building US Dollar Reserves

In November 2013, the People's Bank of China has announced that it is no longer in the country's interest to build foreign currency reserves. Of course, the primary currency they were buying were US dollars - mainly in the form of US bonds.

China has stopped buying US dollars. This is a powerful blow against the US currency.

Russia is Eliminating the Dollar
From Commodity Trades

Russia is establishing a commodity trading exchange on which the prices will appear in rubles.

The details are found here in this article.

Shortly: Russia is responding to recent financial sanctions imposed by the west - therefore they're eliminating the dollar first of all from all petrol and natural gas sales. This undermines the petrodollar system - note that Russia is the biggest producer of oil and natural gas in the World.

Russia will not only sell its own commodities in rubles, it will also re-sell Iran's petrol on the international markets (in rubles as well).

This is another sign pointing out to the contraction of the petrodollar system.

For further details about the petrodollar system, please check this section of Prime Values.

Final Conclusions

The dollar avoidance is already a trend (meaning that it's not just a number of separate events, but a phenomenon consisting of interlinked events).

This dollar avoidance phenomenon is part of the presently undergoing currency wars.

Modern 21th century warfare is primarily being fought in the economy's sphere and through cyber warfare.

Although most aren't aware of it, we are living a time of economic warfare - fought mostly via trade and the financial system.

You might want to check out Jim Rickards' book on currency wars. You'll learn more about this phenomenon that many are unaware of.

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