In a show of good faith between two rising economic powers, China and Brazil have agreed to a bilateral currency swap.
The agreement, which was recently reported in the Financial Times, is the latest in what the FT calls China’s “aggressive campaign of ‘currency swap diplomacy.’” The newspaper points out that China has signed “about 20 such agreements over the past four years.”
The FT notes that these arrangements are “largely symbolic,” but this symbolism is important, representing another step forward in China’s march to internationalize the renminbi.
In this case, the impetus behind the pact appears to be political, not economic, and an attempt to ease “bilateral tensions” between China and Brazil. With both countries simultaneously trying to move up the value chain by doing more high-end manufacturing work, the currency swap represents a diplomatic olive branch that could lead to future cooperation and economic integration.
And China isn’t done with these deals. Indeed, as the country increasingly asserts itself on the international stage it is likely to court more BRIC buddies and other financial partners in an attempt to counterbalance U.S. influence in the global economic and political systems.
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This is just the start, the relationship of risk-off sentiment with the US Dollar is primarily because of its status as one of the main reserve currencies across the world. As it gets replaced, the devaluation of US dollar could get very severe for the reason that there wont be a risk-off sentiment to lift dollar up anymore.
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