Is the Yuan the New Dollar?

Focus: Currencies

Jim Jubak Image Jim Jubak Founder and Editor, JubakPicks.com

As China’s currency becomes easier and easier to trade, and as its economy grows, it is becoming an alternative to the greenback. Here’s how investors can play the trend, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Throughout the global financial crisis—even as the problem changed its focus (and name) from the US mortgage-backed securities crisis to the Eurozone debt crisis—the United States could find solace in the strength of the dollar.

It may not have been a currency backed by the largest gold reserves or a well-run fiscal policy, but it needed only to be less bad than its global competitors. And up against a euro that threatens to come apart and a yen backed by a Tokyo government with an even bigger debt problem than Washington has, the dollar looked good enough.

For liquidity, for the depth of its markets, and for its ease of transfers and payments, the dollar was relatively strong, because the competition was relatively weak. The dollar was a global currency without real competition. That’s been critical to allowing US Treasury prices to rally and yields to fall even after the country lost its AAA credit rating.

The dollar isn’t without long-term competitive threats, however. The most obvious of those has long been the Chinese renminbi, or yuan. (China’s currency is named the renminbi. The units of the renminbi are the fen, jiao, and yuan. It takes ten fen to make a jiao, and ten jiao make a yuan.