The end of the year brings about holiday cheer and a lull in activities around the globe.
There is a stop to the volatile trading on the stock markets. There are no panicky headlines emerging out of Europe. There is no crisis de-jour that makes traders buy or sell the euro.
While all seems to be well with the world, there was a thunderbolt that seems to have gotten no response or notice in the United States.
There is a bi-lateral agreement that has been struck between China and Japan whereby the two countries will promote the trading of the yen and yuan without using U.S. dollars. They will encourage the development of a market for companies involved in the exchanges.
China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.
Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing.
The two governments have given the reason for this agreement as encouraging direct yen-yuan settlement should reduce currency risks and trading costs.
I have been a trader for the past two decades and cannot swallow this flimsy reason as the cause of such a large agreement. And if you know and understand the history between China and Japan through the past two centuries, this agreement takes on an even more sinister outlook.
You see, China and Japan hate each other. There have been serious atrocities and war brutalities between the two countries over a very long time. These scars run deep and are very hard to heal. Yet the two figured out how to reach this agreement.
The common hatred for the U.S. dollar has overpowered the mutual distrust for each other. And that, my dear reader, says volumes of what is the fate of the U.S. dollar in the year to come.
We have seen a surging U.S. dollar the past few months. And we may or may not have some room to run this trade further. But the long-term path for the U.S. dollar is clear.
So don’t get lulled by this inactivity or convince yourself that the surging dollar is a reversal of trend. This is yet another head fake before the decline of the U.S. dollar begins again. And I suspect that 2012 will be volatile for the U.S. dollar.
Once we get past the crisis in Europe, we will see the U.S. dollar get smacked like you have never seen before.
Get active on your diversification out of the U.S. dollar and buy strong currencies like the Norwegian krone, Canadian dollar, Singapore dollar and a few others at bargain-basement prices.
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