Simit Patel

This past Monday, the presidents of Brazil and Argentina signed an agreement to discontinue using the US dollar in bilateral trade between the two nations.

From The Associated Press:

Private businesses will remain free to use whatever currency they would like in their international transactions. Bi-national public integration works, however, will not be used using the US dollar.

MercoPress notes:

What's this mean for currency traders?

1. This decreases macroeconomic demand for US dollars over the long term. This will have little if any impact in the short term, though.
2. da Silva's comments that he seeks greater monetary integration suggests this trend may spread to other parts of South America. If so, this could suggest greater dollar devaluation, and thus currency traders will want to be alert to this potential.

Below are some links regarding this announcement.

Brazil, Argentina to eliminate U.S. dollar as transaction intermedium _English_Xinhua
Press TV - Brazil, Argentina to eliminate US dollar
Brazil - Brazzil Mag - In Brazil-Argentina Trade It's Goodbye Dollar, Hello Peso and Real
Brazil and Argentina Drop Dollar as Trade Currency

Shootanappleoffmyhead

Hey Simit,
Gotta say, your pic looks an awful lot like simon perth.

Interesting topic here. Maybe you can help clarify something for me.

How does the abolition of USD for transactions smooth anything out? I would think it makes it more of a hairy situation. What they mean to say is they believe the U.S economy is destined to drop even further off limiting the feasibility of maintaining U.S currency for trade operations. I also think these nations might be trying to increase the culpable sentiment of U.S dollars, but I can't put my finger on exactly why. Something behind the scenes perhaps? Maybe they are just pissed at the U.S for loaning them so much money for civil development that they could only pay us back with political favors or rights to very large segments of natural resources. Just a thought...it would be one thing if the development costs went to domestic contracts, but of course they didn't...think halliburton...

How does this relate to forex? I'm sure someone can see the bridge.

Simit Patel

LOL, yes I changed my username to my real name. I'm planning on posting more, and I felt weird using a fake name that sounded real....so I switched to my real name.

I would think they central banks of Argentina and Brazil are concerned about the relatively rapid loss of value in the US dollar in 2008. The more it loses value at a rapid rate, the harder it makes it to effectively price transactions (i.e. by the time you receive the money it is worth less than what it was when you negotiated the contract).

In terms of how this relates to forex, two primary points:

1. the US dollar is valuable largely because much of the world has confidence in it and is willing to use it as reserve currency and to finance international trade. If this is no longer the case, it creates less demand for USD, which in turn creates a lower value for USD over the long term.

2. as the links above suggest, this could expand to include other countries in the region, which could further undermine the US dollar as a tool of international trade. That is the trend that I personally am more interested in, as I think it will be of greater consequence economically.

Of course these are long term factors -- technically, the short-term picture looks different, and I'm in a long USD position right now. But I like to keep an eye on the big picture, and know when I am trading against what I perceive to be the macroeconomic reality.