Russia and China have built a closer relationship in recent years and have agreed to a comprehensive partnership. However, this partnership has raised questions and concerns with the recent news that Russia is switching from the U.S. dollar to the Yuan.
Given the potential economic problems this switch will bring to our country, you may be wondering what will happen to the U.S. dollar and what you can do to protect your assets.
The U.S. Dollar’s Global Reputation
The U.S. dollar has been the international reserve currency since 1944. Its status dates back to the Bretton Woods Agreement of 1944 when 44 countries formed the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) and agreed that the dollar would become the world’s principal reserve currency.
Under this system, the dollar was pegged to gold, and most other currencies were pegged to the dollar. As a result, the dollar became the main intervention currency and, consequently, the international reserve currency. Several critical factors contributed to the shift to the dollar, including:
- The dollar’s value has is linked to the U.S. economy’s strength and the Federal Reserve’s interest rate policies.
- The size of the U.S. economy played a significant role, as it’s been considered one of the world’s largest and most influential economies.
- The United States’ geopolitical heft helped solidify the dollar’s position as the leading international currency.
Rubles To Yuans
With the U.S. market teetering towards uncertainty and rising global tensions, the Russian and Chinese central banks agreed to set up a new Yuan currency swap instrument.
A currency swap contract is a derivative contract between two parties that involves the exchange of interest payments and the exchange of principal amounts, in certain cases, denominated in different currencies.
This new yuan currency swap instrument will facilitate trade and investment between the two countries while helping Russia diversify its economy away from the U.S. dollar and Western financial networks.
Why Russia May Shift Currencies
As the U.S. experiences domestic difficulties leading to the dollar devaluing, it creates concern for our once-strong nation’s global position. This devaluation is just one reason Russia has been looking to reduce its dependence on the U.S. dollar.
America’s Current Unstable Economic Market
2023 was a tough year for the U.S. economy. The holy trinity of interest rates, inflation, and unemployment has spiraled out of control, and consumer confidence has plummeted.
Inflation is causing wages to fall and prices to rise, which has led to a decline in demand for goods and services.
The government has also taken a number of measures that negatively impact the economy, such as high taxes and tariffs.
These measures have hurt businesses, leading to a decrease in investment and job creation. All of this has contributed to the current state of the U.S. market and global uncertainty about the strength of the U.S. dollar.
U.S. Imposed Sanctions And Exclusion From SWIFT
The Russian ruble has been losing value for years. The trend started when the United States and the European Union imposed sanctions on Russia after it annexed Crimea from Ukraine in 2014, and the recent Ukraine war hasn’t helped.
More recently, Russia was excluded from the Society for Worldwide Interbank Financial Telecommunication 2022 as part of a series of economic sanctions imposed by the U.S. to weaken the Russian economy in hopes of ending the Russian-Ukrainian war.
SWIFT is an international financial organization that provides banks and other organizations with secure and reliable means of communicating money transfer instructions, making a significant contribution to facilitating global payments between financial institutions.
The exclusion of SWIFT means that Russia can no longer use the U.S. dollar as a means of payment for international transactions involving U.S.-based institutions – adversely affecting the country’s economic stability and its foreign relations with America.
Reduce Dependence On The U.S. Dollar And Diversify Holdings
The U.S. Dollar has lost value recently, prompting many countries to seek an alternative global currency. By switching to the Yuan, Russia will reduce its dependence on the U.S. Dollar and move its holdings to a more stable currency.
The Yuan is gaining popularity due to its stability and low volatility compared to other currencies. By switching to the Yuan, Russian companies could significantly reduce costs associated with foreign exchange transactions, as they’d no longer need to convert their profits into rubles before repatriation.
This strategy is also consistent with China’s long-term goal of establishing its own currency as a major international player. If Russia switches to the Yuan from the Dollar, it could lead to global financial changes that would challenge America’s economic dominance and give Beijing an advantage over Washington’s geopolitical influence.
What Would Happen If Russia Shifts To The Yuan
If Russia turns to the Yuan, you can expect changes to our economic market. Some of the differences you’ll see will be both domestic and international changes to the Dollar.
Altered Global Market And Trade Dynamics
The switch to the yuan could affect global markets and trade dynamics. It’ll likely increase China’s influence in international finance and possibly lead to a further entrenchment of its geopolitical power.
China’s increased influence would be a major blow to the U.S. dollar, as Russia is increasingly using the Chinese currency for its trade activities. This means that in the event of economic sanctions against Russia by other countries, Beijing may be able to offer more protection than Washington because it uses a very different currency.
As Russia becomes increasingly dependent on Beijing’s goodwill and monetary policies, this could lead to an imbalance of regional political and economic interests between Moscow and Beijing. This could disrupt existing global partnerships, such as those among members of NATO, or create new alliances based on alternative priorities dictated by China’s growing influence in international affairs.
Further Devaluation Of The U.S. Dollar And High Rates
If the value of the dollar declines, Americans can expect the cost of imported goods and services to rise. This price increase may contribute to an overall increase in inflation that negatively impacts consumer purchasing power and potentially slows economic growth.
If firms face higher production costs due to more expensive imported goods, it’s likely that they’ll pass these higher costs on to consumers. This could lead to price increases for everyday goods such as food and clothing, further straining already cash-strapped households.
If imports become too expensive for companies to source from abroad, this could lead to job losses in those industries as they instead begin to produce their own materials domestically. Ultimately, high inflation caused by rising import prices can have extremely detrimental effects on businesses and consumers.
Potential For Other Currencies To Follow Russia’s Lead
Russia’s adoption of the yuan as a major currency could transcend its own economy. The switch could lead other countries to follow suit, especially those facing similar economic problems as Russia.
This could apply to countries that are heavily dependent on U.S. dollar trade and reserves and are looking for an alternative method of management. If the Russian experiment proves successful and provides stability, it is only logical that other countries will look at the Chinese currency model with renewed interest.
This could lead to greater global acceptance of the yuan as a viable substitute for the U.S. dollar and possibly weaken its position as the dominant world reserve currency.
Protect Against Dollar Devaluation With Gold
Precious metals have long been considered a safe haven in times of economic uncertainty. Their intrinsic value and limited supply make them less vulnerable to market fluctuations and inflationary pressures.
As a potential move to the Yuan plays out, demand for gold and other precious metals may increase, leading to a rise in their prices.
This increased demand may provide investors with the opportunity for capital appreciation while protecting them from negative effects on the value of their other investments.
Hedge Against Currency Devaluation
As the U.S. experiences a decrease in currency demand, there’s a high chance that the dollar will experience devaluation. Precious metals have been considered a safe haven asset for decades, and their prices tend to increase when the value of the U.S. dollar decreases, providing a hedge against devaluation.
As the Yuan becomes more widely accepted worldwide, investing in precious metals could become even more attractive for those seeking protection from currency fluctuations caused by shifting geopolitical dynamics.
Portfolio Diversification
Investing in precious metals can help diversify your investment portfolio, reducing overall risk and providing a buffer against market volatility. Diversifying your assets to include gold and silver can help create a more balanced portfolio better equipped to withstand economic shocks and currency fluctuations.
This diversification strategy can lead to more stable returns over time, regardless of the performance of individual asset classes.
Protect Against Currency Fluctuations With Precious Metals
If you’re considering making an investment in precious metals to protect your assets against market fluctuations, Noble Gold Investments has a number of options to choose from. Whether you’re looking for physical bullion that you can store at home or you’d prefer to invest in a tax-deferred gold and silver IRA, our team is standing by to help you shift your assets to precious metals.
Give Noble Gold a call at (877) 646-5347 today to speak to a member of our team.
