Since the
second World War the dollar has been the number one reserve currency. Most of
the commercial deals are paid in dollar, doesn’t matter it is in China, Brasil,
Canada…etc. But there are two challenger, like EUR or Yuan. But the dollar is
still the reserve currency simply because foreign countries hold their huge
quantity of reserves in dollar.
Historically
as you see below on the chart the first reserve currency was the British pound
sterling. Toward the end of World War II the US dollar was given this status by
international treaty following the Bretton Woods Agreement. During that post
war period the Fed did not inflate the dollar and stood ready to exchange
dollars for gold at $35 per ounce. After 1971 FED started to evaluate the
dollar against the gold.
Recently
the FED has been inflating the dollar massively further, reducing its
purchasing power in relation to other commodities. There is evidence that China
has understood that point. It has increased its gold holdings and has
instituted controls to prevent gold from leaving China. Should the world’s
second largest economy and one of the world’s greatest trading nations tie its
currency to gold, demand for the yuan would increase and demand for the dollar
would decrease.
It means that the world’s great trading nations would reduce
their holdings of dollars. If the FED continues the US policy of continuing to
cheapen the dollar via QE would mean weaker and weaker dollar. In this scenario
the most likelihood that demand for dollars will decline even further, which
creates a long side movement on EURUSD in major trend.
Have a great week!
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