The news from the G7 summit that China plans to completely offload US dollars is not something to be taken lightly.  US Dollar value would slump significantly against a background where China is buying more Euros and gold to back up its currency.  There has even been talk to hat China will shift to the multi-currency SDR form of reserve and push economies around the world to follow suit.  This news comes as no surprise to those of us who followed the G20 summit just a few short weeks ago.

This news about the G7 talks, coupled with the fact that China has announced it would certainly buy more Euros has European nations consumed with worry.  A move like this would send the US dollar downward and the Euro upward, creating and even worse situation in Europe as US importers would be able to buy far less European exports.  A blunt shift from the USD to Euros or even SDR's would create an even larger world economic tremor than has been seen in the past nine months with the current recession.

Not only would a move by China to dump US currency as a reserve hurt the US recovery, it would further lengthen the world's economic recession as well.  The Japanese Yen, among other currencies would be directly affected as well.  A rise in the value of the yen makes it harder to other economies to import as many Japanese exports as they have in the past.  Japan would be in a better position to pay off debt but countries that consume Japanese goods would be in a worse position to help Japan out of the recession because of their diminished buying power.

Perhaps the collapse of the US Dollar as a reserve currency is something that has been in the works for years.  Perhaps China is using the leverage that the current economic recession is providing to push the US off of its pedestal as the world economic leader and major player when it comes to world economic policy and decision making.  For China, the time is right to execute such a plan.  But for US consumers and other countries worldwide, it's hardly the best time to be talking about switching reserve currencies as the recession is beginning to look like it will stick around for a few more years.

A shift to SDR's could also spell the demise for the US Dollar entirely.  In a situation like this, people that have investments that are hedges against inflation, like gold, silver, other precious metals, as well as holders of large amounts of foreign currency positions are poised to really benefit from China's moves.  Any time a country like China, that is now emerging as the world's most economically influential entity threatens a move as drastic as it has in the G20 and now is threatening in the G7, investors need to take a close look at how they are positioned to either gain or lose from such a scenario.  Either way, changes can be made to help take the edge off of a move to dump the USD in favor of an alternative reserve currency.