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China and Singapore Ditch the U.S.

Dollar for Direct Trade


The U.S. Dollar (USD) has long time enjoyed premium status as an unofficial global currency. Its
understandable, given the size of our economy and considering the fact that the United States produces
about 22% of the worlds entire economic output.

Much international trade is transacted using the


USD because many countries currencies are
pegged to the Dollar. The fact that the Dollar
accounts for about 61% of the worlds foreign
exchange reserves confirms its strong position in
international trade.
However, the Dollar is in a precarious position
because the U.S. Government accumulates more
debt than other global economies. For instance,
the federal debt held by the investing public now
stands at 74% of the U.S. economy and is projected to rise to 106% of our Gross Domestic Product by
2039 if the current economic situation continues.
The international community is already painfully aware of the problems plaguing the U.S. economy and
the Dollar. So, investors are looking to the Chinese Yuan and other foreign currencies as an alternative to
the U.S. Dollar.
Lets examine how global investors focus is shifting away from the Dollar, and how the Iraqi Dinar may
benefit from this paradigm shift.
The Dollar has lost its preferred-currency status
China and Singapore have begun settling international trades directly, bypassing the U.S. Dollar
China has recently announced that the two nations will begin settling their international trade directly in
Chinese Yuan (CNY) and Singapore Dollars (SGD), avoiding the USD entirely. Its part of Chinas plan to
enhance the status of the Yuan as an international currency to replace the Dollar.
Prior to this agreement, China needed to convert Yuan to Dollars before trading with Singapore; likewise,
Singapore had been obligated to change SGD to USD before finally converting USD to CNY. Now, China
and Singapore will be trading directly without any need for the U.S. currency.

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The China Foreign Exchange Trading System (CFETS) lists the currencies with which the Yuan is directly
traded. It includes the U.S. Dollar, the Euro, British Pound, Japanese Yen, Australian Dollar, New Zealand
Dollar, Malaysian Ringgit and Russian Ruble.
China is well known as an international trade giant, and Singapore is the third-richest country in the
world as measured by per capita GDP.
The end of the dollarized trade between China and Singapore will have a detrimental effect on the value
of the U.S Dollar. The reason is simple: The value of a currency is based on demand from buyers who
need it to complete their international purchases. So, less demand means lower value for the USD.
The beginning of direct China-Singapore trade settlement in Yuan will reduce the U.S. Dollars use
worldwide. This reduction will inevitably weaken the Dollar. Of course, the weakening of the Dollar is
good news for the Iraqi Dinar, which has been pegged at an artificially low exchange rate against the
Dollar for more than two decades.
China and the European Union begin to settle their trade directly in Yuan and Euro, bypassing the

Dollar
Another event driving the U.S. Dollar downward while the Chinese Yuan rises is the commencement of
direct exchange convertibility between the Yuan and the Euro.
Early last month, the Peoples Bank of China (Chinas central bank) announced that it has now authorized
direct currency trading between the Yuan and the Euro in the interbank foreign exchange market.
The Euro is the second most-traded currency in the world after the U.S. Dollar. So, direct exchange
involving the Euro and Yuan is likely to attract a large volume of trading, leaving the intermediary Dollar
behind.
The European Union is already Chinas secondbiggest trading partner. So, the level of trade
settled strictly between the Euro and Yuan will
further reduce the value of the Dollar. Direct
convertibility between the Euro and the Yuan will
eliminate the need for dollarized trade between
China and Europe. The further decline in the
Dollars value will likewise cause the Iraqi Dinar
to appreciate in value.

Koreans are dumping the Dollar and piling

into the Yuan


Another trend which highlights the declining
strength of the Dollar is the fact that Koreans

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are ditching the Dollar in favor of the Chinese Yuan, by increasing the volume of their domestic deposits
in Yuan instead of Dollars. The Bank of Korea (South Koreas central bank) reported a 5,482% increase in
South Korean domestic deposits from CNY 290 million in 2013 to CNY 16.19 billion this year.
The statistics also show that the value of Korean foreign deposits held in Yuan-denominated accounts
was 0.4% at the end of 2012. By the end of 2013, the value of South Korean foreign deposits held in
Yuan had skyrocketed to 13.7%. As of July this year, about 25.9% of Korean foreign deposits were held
in Yuan.
One of the reasons behind Koreans stockpiling of Chinese Yuan is the Chinese currencys strength
relative to the zero-interest rate environment in Korea. Yet, the fact that foreign deposits held in Dollars
are decreasing, while foreign deposits held in Yuan increase, and suggests that its time for investors to
look beyond the USD.
Increasingly, investors are migrating from the Dollar into oil-backed currencies such as the Iraqi Dinar in
the Middle East, and industry-backed currencies such as the Chinese Yuan in Asia.
How did the Dollar become so ugly?
The end of the Dollars status as a global currency for international trade settlement is just another nail in
the USD coffin. Frankly, it seems doubtful that the declining fortunes of the Dollar could be reversed
anytime soon. The underlying reason for the Dollars ugliness is the colossal debt burden that hangs
around the neck of the U.S. Government.
The U.S. Governments debt is shockingly high. Its much higher than that of the worlds five richest
countries (by per capita GDP) as shown in the chart below.

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In contrast to the five wealthiest countries, the U.S. debt burden has been the worlds highest for the
past six years. And, its frightening to know that the U.S. debt-to-GDP ratio has grown by 61 percent
since 2006. In fact, the U.S. debt-to-GDP ratio is at 106.5% right now, which is more than twice
Switzerlands national debt ratio, and about five times the debt ratio of Australia.

Weaker Dollar means stronger Dinar


The weakness of the U.S. Dollar relative to the strength of the Yuan is good news for the Iraqi economy
and Dinar. Most importantly, Iraq can now sell its oil to Europe and Asia using contracts denominated in
other currencies, such as the Euro or Yuan.
Iraq generates about 99% of its revenue from crude oil exports to India, China, South Korea, Japan, Italy
and Spain. About 30.07% of Iraqs oil exports go to India, 15.51% of exports go to South Korea, Italy
accounts for 6.97%, Spain accounts for 5.98% and Japan takes 4.24% of Iraqi oil.
Obviously, the majority of Iraqi oil exports are shipped to Asia and Europe. The direct convertibility
between Yuan and Euro will now enable Iraq to increase its oil revenues, and it raises the possibility of
pegging the Dinar against much stronger currencies than the Dollar.
Opportunity in the expected Dinar revaluation
The greenbacks decline raises the likelihood of an upward revaluation for the Iraqi Dinar soon. Right
now, the Dinar is far undervalued at the current rate of USD $1.00 equals IQD 1,165. Hence, each
further drop in the Dollars value begs for an increase in the Dinars price.
Nations such as China and Singapore have been tiptoeing away from using the Dollar as a global
currency for settling international trade. These two nations are doing business by exchanging their
currencies directly, without any need for the Dollar as an intermediary currency. Less support for the
Dollar means more support for the Dinar.
As Iraq continues to sell ever-larger quantities of its oil for payment in the Yuan and Singapore Dollar, the
U.S. Dollar is likely to continue falling while the Iraqi Dinar rises.

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