The Not-So-Mighty Dollar

Although this happened two weeks ago, I thought it may be important to address it here. Brazil and Argentina have decided to stop trading in dollars and instead conduct bilateral trade in reais and pesos.

So, is this further proof that the dollar is weakening and the U.S. economy is going into the crapper? Does it signify loss of financial clout for the U.S. in the Southern Cone? What does it all mean? To answer these questions, I have asked for the expert advice of our friend EW, who knows much more about these concepts than I ever will:

The short of it that I’d anticipate an increase transaction costs from the transition, as both currencies will still need to be priced against one another, and the basis for doing that will in all likelihood continue to be their relative prices against the dollar. The commodities (especially) and manufactures produced by the two countries are priced in world markets in dollars, so they will need to re-price everything in terms of one currency or the other. They’ll also have to agree which currency, the real or the peso, in which to conduct trade. Additionally the banks will still need to exchange for dollars in order to conduct trade with all other countries, so whichever currency is decided upon will still often be exchanged for dollars in order to conduct trade with all countries that are not Brazil/Argentina. Though I’m no expert, I don’t see Brazilian banks sitting on large sums of Argentine pesos, or vice-versa. In sum, I personally do not believe that this move would facilitate and increase bilateral trade flows between the two countries (as was suggested by Lula). The move will probably inhibit both bilateral trade by increasing the cost of doing business, probably lead to political disagreements over which currency is a the base currency, and will have no (or a slightly negative) effect on trade with the rest of the world, which will continue to be conducted in dollars.

Essentially, it sounds like it's much ado about nothing...perhaps a symbolic move from two nations eager to prove they are free from the financial yoke of the U.S. and its influences. As for if this signals a global shift away from the dollar to the euro or whatever, it remains to be seen.

This doesn't change the fact that traveling abroad with dollars right now cannot be too much fun.