The purchasing power parity theorem considers a world in which there is no single, single reserve currency, assuming many world trade centers, which does not correspond to the current situation. However, the crisis of the global dollar-based currency exchange system and the trade wars unleashed by President Donald Trump are forcing governments of nascent power centers to seek a gradual replacement for the US dollar as the universal equivalent of value.
So, for example, when paying for goods in Asia, the Chinese yuan has already overtaken the Japanese yen and is gradually replacing the US dollar from circulation. At the St. Petersburg Economic Forum, held in early June, China and Russia agreed to exclude the US dollar from mutual settlements, Iran and Turkey are taking the same path.
The trend of abandoning the dollar is only gaining speed, but it is no longer possible to stop it. The more the United States introduces trade duties, the more it restricts financial settlements in dollars, the sooner the dollar will lose its function as a universal unit of account in world trade. Trade wars will inevitably lead to fragmentation of the world economy into separate currency and customs zones, where the Purchasing Power Parity Theorem will operate in its entirety, bypassing the intermediate link in the form of the US dollar. No one knows when this will happen, but no one doubts that this will happen.
The purchasing power parity theorem, along with the interest rate parity theorem, is the fundamental law of the foreign exchange market. In turn, the study of the interdependence between goods and currencies is an element of a “true” fundamental analysis, in contrast to studies of various news – “fundamental” indicators of the economy, which a private trader is simply not able to study, primarily due to the limitations of his knowledge and resources . However, knowing how this works, an inquiring mind will always find the application of the fundamental laws of the foreign exchange market to profit from conflicting situations. Seeker, may he find it!