Dollar Departure For Chinese Exporters Andrew Jeffery Mar 28, 2008 8:45 am |
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We learned yesterday that one of the world's biggest pension funds is shunning the paltry returns on U.S. government debt. Today the Financial Times is reporting that an increasing number of Chinese exporters are migrating away from the dollar to settle non-U.S. transactions.
Alibaba.com, a company parly owned by Yahoo (YHOO) that hooks up international buyers with Chinese suppliers, says the vast majority of its 700,000 suppliers are moving to pounds, euros or even using China's own renminbi to complete sales.
Abandoning the dollar is an attempt to minimize currency risk. Alibaba's chief executive explained his company's position, saying that prior to greenback volatility, dollar prices were valid for a month or two. Those same quotes are now good for just seven days.
The Federal Reserve's money printing operations and a stumbling U.S. economy have sent the dollar on a wild ride. The short dollar trade is so crowded, and currency traders are so nervous about central bank intervention into the currency markets, that the dollar's moves have become increasingly volatile.
Multinationals like General Electric (GE) and McDonalds (MCD) with strong overseas sales benefit from a weak dollar. But they must also protect against a jump in the currency. If the greenback were to pop, their bottom lines would take a direct hit. Firms incur currency hedging expenses to defend against these such moves. The bigger the swing, the more expensive the hedge.
Countries and industries must carefully weigh both the economic and political impact of a dollar departure. The U.S. is the primary trading partner for much of the world. Often the value of that relationship can trump a weakened dollar, but the fact that political expedience is being given less and less consideration illustrates how dire the economic situation has become.
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