The U.S. dollar has been the world's de facto reserve currency for almost 90 years.
But this financial dominance may be nearing its end.
In recent years, China's been floating the idea the yuan should take on the dollar's role as the world's reserve currency.
In fact, the Chinese have already negotiated numerous bilateral trade deals that completely bypass it.
And they've even called for efforts to "de-Americanize" the global economy.
Whatever happens, China's economic rise foreshadows increased influence.
It's a trend that not only has serious implications, but also great profit opportunities, if you know what to expect…
A (Very) Brief History of Reserve Currencies
Along with reserve currency status come the roles of financing international trade and acting as a store of value for governments worldwide.
When we look back over the past 500 to 600 years of reserve currencies, an interesting pattern emerges.
As this chart shows, since the mid-1400s, there have been six different reserve currencies.
Tied for the shortest lifespan are Portugal and the Netherlands at 75 years, while the longest tenures are Spain and the UK, both at 110 years.
The average has been about 95 years… and the U.S. dollar has presided for the past 88 years.
As you can see, reserve currencies come and go. It's not a question of if, but when. And it appears the greenback's dominance has reached its twilight.
Until 1971, when Nixon closed the "gold window," overseas dollars were backed by gold. That meant foreign governments could redeem their American dollars for gold at $35 per ounce.Â
But the 1950s and 1960s saw ballooning deficits, inflation, and swelling debt from welfare and warfare as America's share of the world economy shrank.
So Kissinger and Nixon hatched the petrodollar system, whereby the United States would provide political and security support to Saudi Arabia's royal family. In exchange, all oil deals would have to be transacted exclusively in dollars, and the House of Saud would buy lots of Treasurys with their greenbacks.
In effect, this guaranteed a constant and elevated (though artificial) demand for U.S. dollars worldwide.
But still, using the unbacked dollar as a world reserve currency is a massive experiment in fiat money.Â
It's never been tried before… and it's unlikely to end well.
The Emerging Yuan
In the past few years China established a string of currency swaps with other nations to settle trade, bypassing the dollar completely.
The goal is to help internationalize the yuan by gradually growing its level of acceptance. It's working.
On Dec. 4, 2013, the Wall Street Journal reported that China's growing slice of the world's economic pie saw the yuan overtake the euro and yen in trade finance.
According to the Journal, "That made the yuan the second-most used currency in trade finance but still well behind the U.S. dollar, which backs 81% of trade finance." The yuan now accounts for 8.7%, but it's gaining quickly.
In October, China announced a 350 billion yuan ($60 billion) swap for euros with the European Central Bank. That ranks second only to its previously established 360 billion yuan swap line with South Korea. There's even a 400 billion yuan agreement in place with Hong Kong.
There are as many as 25 such swap agreements in place with various nations, estimated to be worth nearly $1 trillion. Corporate debt issued in yuan has nearly doubled in the past couple of years to around $50 billion.
So clearly, the yuan is being readied for internationalization.
China's central bank has stated the yuan would become "basically convertible" by 2015.
But what the yuan may look like before trading freely is what's most intriguing.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.