Too Early For Yuan to Replace U.S. Dollar

There has been a lot of speculation concerning the goal and strategy of China concerning the place of the yuan or renminbi on the world economic stage.

I have no doubt the Chinese have a goal of becoming the leading reserve currency in the world, but if that ends up being a reality, it's going to be many years from now.

The idea that China is attempting to bypass the existing currency market and working to build an alternative to it is actually the exact opposite of what it really wants to do, which is to become a larger player in the current global economy.

For now, the yuan isn't close to being ready to be a currency leader, as China needs to take a number of steps before it's going to be considered a means of paying for major transactions on a global basis.

China's first step will be to push to be accepted as a reserve currency at the International Monetary Fund. In October the IMF will convene to review, among other things, whether or not to include the yuan in Special Drawing Rights group of reserve currencies. This review only occurs twice over a 10-year period, so it's important for China to get this done; which I think it is likely to accomplish.

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US Dollar, Economic Influence, Waning on Global Stage

The rebuke and rejection of the request by the U.S. to pressure China to into increasing the value of the renminbi by the G-20 underscores the declining economic influence of America in the world, as well as the U.S. dollar, which has become a disaster.

Not only was the idea of pressuring China on their currency rejected, but the U.S. and the disastrous Federal Reserve were castigated by economic powerhouses like China, Germany, Brazil, France and Korea for their policy of acquiring U.S. government debt and flooding the world with U.S. dollars.

Even with all of that being true, it's interesting to see European countries hit out at the U.S. when Europe is still a disaster as far as sovereign debt goes, although Germany and France are healthy in that regard.

It's the unwillingness of the Obama administration to introduce austerity measures like most countries in Europe have that is outrageous to most, who have said the U.S. must stop the economic strategy of growth through going into deeper debt.

Europe has already proven these socialist plans don't work, and even though there will be a lot more pain to go through in Europe, the pain is coming from taking the right steps, not from misguided policies.

Many laugh at the foolishness in Europe from their coddled classes who have become "kept" by the governments, but how far is the U.S. behind that scenario, as the inability to pay for reckless promises by the U.S. government over the decades is coming home to roost.

As far as the trade surplus that always comes up in difficult economic times, American consumers have made the decision to buy quality and inexpensive products from China and other countries. This same nonsense was brought up when Mexico was producing many of the goods Americans bought.

That has to do with the overpaid American workers, especially those in unions who can't compete with their counterparts in other areas of the world. Until those problems are addressed, America will have this problem no matter which country is the latest to enter the manufacturing sector.

The Obama administration, as have most previous administrations, give lip service to this to play to their base, but the cat has been long out of the manufacturing bag, and there's no bringing back what has been a past that is no longer relevant.

America's economic day is over. They've allowed the Federal Reserve to destroy the value of the U.S. dollar and create a class of consumers based on debt consumption, which had been driving the global economy. That day is now past, and will never return to levels before the economic crisis hit.

The only reason the U.S. dollar even remains the reserve currency of the world is no one else really wants to allow their currency to replace it, as it would drastically reduce the flexibility they now enjoy.

If a country like China eventually were to allow their currency to become the reserve currency, it would only be done for national pride and not for any benefit to themselves. I wonder if they'll end up getting suckered into that?

Some nations in the East have already been making transactions without the U.S. dollar being part of it, and calls for a variety of different ways of going forward have already been suggested, including possibly a basket of currencies, or even returning to some type of gold or commodity standard currency could be based upon.

For the U.S., they need to drop their being the policeman of the world, drop being a nanny state, and get their hands out of the free market. Until that happens, the country will continue to spiral downward economically itself, and in its economic influence around the world.

China, U.S. Currency War Escalating

China shot off its own response to the aggressive comments by some American politicians and business leaders over the alleged idea that they are manipulating their currency to their own advantage.

With political pressure in the U.S. mounting, this could turn into an unpleasant and unprofitable dispute for both countries, with the U.S. having the most to lose.

Some business groups claim the yuan is undervalued as high as 40 percent, although that's largely conjecture and not able to be proved.

Even so, the Chinese currency is almost surely undervalued to some degree, and could rise some if allowed to by the Chinese authorities.

But the problem is the way America is dealing with the situation, where populist-leaning lawmakers from America are making a lot of noise in order to get noticed by their constituents regarding looking like they're doing something about the problem.

With China holding so much U.S. debt and being in the much stronger position from that point of view, it doesn't make much sense to do the public saber-rattling which can sometimes lead to stupid decisions because of not being willing to back down.

China asserts its global trade surplus will probably drop to a trade deficit in March, after plunging by 50 percent in January and February.

Eldorado Gold (NYSE: EGO) Chinese Currency Exposure

Any time and company enters a foreign market, they gain exposure to flucuating value in the nation's currency, and that's the case with Eldorado Gold (NYSE:EGO) when they entered the Chinese market in 2009 via the acquisition of Sino Gold Mining in China.

While a small change in the value of the reminbi wouldn't have a significant effect on Eldorado Gold, a major move definitely would.

But taking that into account, the Chinese have never succumed to pressure to float their currency, and while thinking about it for the long term, over the next several years it's highly unlikely to happen.

Even so, investors in any company with China exposure need to know the effects of a change in monetary policy of the Chinese, especially if it's allowed to move upward in strength.

In the short term there's nothing to be concerned about with Eldorado Gold and other gold mining companies, but it does need to be taken into consideration for those planning on holding the company for some time.