One product of banks worldwide deciding to stop lending to each other was that they could no longer be sure that their correspondent bank would be around in a month or so to pay up on letters of credit (L/Cs). This has made L/Cs harder to obtain in some quarters.

Meanwhile the all round tightening of credit has also made L/Cs harder to come by for international traders and this shortage is now having a severe impact on the shipping sector as well as international traders.

Now, with letters of credit (L/Cs) already in short supply, fears are growing that the strengthening US dollar is going to make life even harder for international traders to obtain credit.

Dollar pricing

International deals for most commodities tend to be written in US dollars, a reflection of the reliance on prices often determined on commodities futures contracts written in Chicago andNew York.

A large proportion of international bulk cargo and finished goods trades tend to be written in US dollars too.

Rare commodity

When US banks stopped lending to overseas banks, the supply of dollars available for international trades worldwide fell dramatically, making the US currency a rare commodity.

Many countries rely on foreign trade to keep their economies afloat. In France and Germany for example foreign trade accounts for more than 60 per cent of their GDP.

Moreover, countries within the Eurozone tend only to use Euros for trades within Europe and need US dollars to trade with the wider world.

Gloomy predictions

Now the US dollar is surging as supply falls short of demand, leading some analysts to predict dire times ahead.

BNP-Paribas for example anticipates that one US dollar may be worth more than one Euro by next year.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.