The Dollar Is Still King

The dollar is posting broad-based gains today, with the yen as the notable exception. Despite the upticks, which are carrying the greenback to the upper end of its recent consolidative ranges, there continues to be much talk about the dollar's future as the numeraire -- the key currency in the world economy -- especially ahead of the G-8 meeting later this week.

Today, three Shanghai companies have agreed to settle trade contracts in yuan for the first time. The deals with customers in Hong Kong and Indonesia are worth an estimated $2 million. The People's Bank of China has arranged a total of CNY650 billion (about $95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea, via currency swaps.

The president of the Bank of China, which is one of the two Chinese banks that press reports indicate are offering yuan settlement services, was quoted on the news wires: "More and more companies will choose yuan to settle international trade as China's economy gets stronger and its financial market plays a more important role in the world."

This may sound reasonable, but it simply does not stand up to the historic tests. By that reasoning, for example, sterling and the yen should be larger invoicing currencies than they are. Almost half of Japan's exports are invoiced in dollars -- and of course very little, if any, of these exports are commodities that are denominated in dollars, like energy or foodstuffs. A little more than a quarter of U.K. exports are invoiced in dollars. Some Japanese auto-parts makers reportedly insist on invoicing in euros, forcing U.K. companies to bear the burden of the decision to stay out of the EMU.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.