By: Dr. Mike Campbell

Once upon a time, all international trade balances had to be settled by the transfer of gold, but eventually, the sheer volume of international trade brought that era to a close. It was replaced by a US Dollar-backed gold standard where deals could be settled using fiat money (US Dollars) which could be swapped for gold. This standard came crashing down in the Nixon shock when the link between the currency and gold was broken. The spot price for gold metal on the metal exchanges had risen well above the “paper money” value and speculators were redeeming Dollars for more valuable gold metal and making a killing.

Today, most major currencies are readily inter-convertible, but not all. If companies in China and Japan wish to do business, Yens and Yuans must first be converted into US Dollars and the Dollars converted into the target currency. The only person benefitting from this arrangement is the banker that handles the transaction, making commission on the deal.

An Eye on Asia

Chinese and Japanese authorities have announced moves to make their currencies directly convertible. This, they hope, should boost bilateral trade and reduce the cost of doing business by removing the US Dollar conversion step from the equation. China is Japan’s largest trading partner with the value of trade estimated to be worth $339 billion last year. The move will also strengthen China’s bid to generate a more global position for its own currency.

Japan is also believed to be negotiating a currency swap deal with India which would allow both nations access to foreign exchange reserves that they hold. The move is said to be to bolster liquidity over the short term.