Would China succeed in moving away from US dollar?

Global Oil Market

In a move that would see oil traded in a unit based on a basket of currencies including the Chinese yuan and Japanese yen, and a new currency intended for use by Middle Eastern states, in place of the US dollar, has been viewed by some as the latest sign of a realignment in global power.

China is eager to disrupt the already shaken US dollar by cutting global reliance on the world's strongest economy, and take advantage of the nation's unpopularity thanks to some controversial foreign policies.

According to the UK newspaper The Independent, finance ministers and central bankers have held meetings in Russia, China, Japan and Brazil to discuss the idea, which the Americans are aware of. A number of Middle Eastern states have now involved themselves in the discussions, no doubt as a result of increased pressure from China, with whom the Middle East conduct a substantial amount of its oil-based business.

The financial crisis has done little to help the US dollar's cause, which has fallen to a record low of 62.8 percent in the second quarter of this year. There have also been reports that Russia, Brazil, India and China have already discussed buying each other's debt as a way of cutting their dependence on the dollar, while the United Nations last month proposed a new global currency to replace the greenback.

But as of yet, there is no substantial evidence that the parties involved are truly serious about their idea to bring down the US dollar. Ben Simpfendorfer, chief China economist for Royal Bank of Scotland, told Bloomberg: "I don't want to overplay the importance of the story. There's no credible sources there."

Before China embarks on a mission to replace the still powerful US dollar with a mixed back of weaker currencies, may I suggest they concentrate on the stability of their own economy. Yes, China are rapidly emerging as a global super-power, but it remains to be seen whether its economy can cope with the extreme growth. The same goes for Russia, who should focus on diversifying enough to avoid relying so heavily on resources that will not last forever.

As for the Middle East, the region is unlikely to remain stable enough, financially or politically, to mount a serious challenge on the US economy.

Threatening to stop trading oil against the dollar is something that is obviously going to attract attention. Oil is still the most important product on any market, any where. So trying to disassociate the US currency from such a powerful resource is something that China hopes will contribute to the demise of the US dollar. But is also something unlikely to happen very soon, or even at all.

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