The end of US$ dominance? True or False: Dollar falls on oil plan report

Discussion in 'International Politics' started by redragon, Oct 6, 2009.

  1. redragon

    redragon Regular Member

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    The dollar has fallen following a report that Gulf states are in secret talks to replace the greenback as the main currency for the trading of oil.

    Nations including Saudi Arabia and the United Arab Emirates were speaking to Russia, China, Japan and France, said the UK's Independent newspaper.

    However, Saudi Arabia subsequently said the report was "absolutely inaccurate".

    It caused the euro to rise 0.4% against the dollar to $1.47040. The pound also rose, by 0.4%, before falling back.

    The pound reached $1.5991 before dropping back to $1.58920.

    The fall in the value of the dollar had a knock-on impact on the price of gold, which rose to a record high of $1,036.60 an ounce.

    Gold rose because a weaker dollar - in which it is valued - increases its attractiveness to investors.

    The Independent's report said the Gulf states wished to replace the dollar over a nine-year period with a basket of currencies including the yen, China's yuan, the euro, and the new unified currency planned for nations in the Gulf Co-operation Council, which include Saudi Arabia, Kuwait, the United Arab Emirates and Qatar.

    Kuwait also denied the article's claim.

    "We have never discussed or proposed this," said Kuwaiti Oil Minister Sheikh Ahmad Abdullah al-Sabah.

    China's central bank suggested in March that the dollar should be replaced by a new global reserve currency run by the International Monetary Fund.

    BBC NEWS | Business | Dollar falls on oil plan report

    This is a rather more important news I believe
     
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  3. redragon

    redragon Regular Member

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    Australia raises interest rates
    Australia has raised its main interest rate to 3.25% from 3%, becoming the first G20 nation to do so as the global economy begins to recover.

    The move by its central bank was not unexpected as the Australian economy was the only one in the developed world to expand in the first half of 2009.

    In fact, Australia managed to avoid recession, only seeing its economy contract in the last quarter of 2008.

    Its government has helped the economy with major stimulus spending.

    It has spent 42bn Australian dollars ($35bn; £21bn) on schemes including cash handouts for pensioners and for low and middle-income families, and a number of infrastructure projects.

    This helped the economy to grow 0.4% in the first quarter of this year, and by 0.6% in the second, rebounding from the 0.5% contraction between October and December 2008.

    'Gradual move'

    "The Reserve Bank of Australia (RBA) had widely advertised it was near to edging up rates from their extraordinary lows, and now it's done so," said Rory Robertson, interest rate strategist at Macquarie.

    "It will be a gradual move from an emergency rate of 3%, to a still-easy 4%."

    Mr Robertson added that if the Australian economy continued to expand as expected, rates could return to "a more normal 5%" in the next year or two.

    Tuesday's move is the first time the Australian central bank has increased interest rates since March 2008.

    The Australian economy has also managed to avoid falling into recession thanks to the strength of its mining sector, which has continued to see strong demand from China for its iron ore and other commodities.

    "The Australian economy is outperforming other advanced economies, and I guess many economists will see the decision today as a consequence of economic recovery," said Federal Treasurer Wayne Swan.

    BBC NEWS | Business | Australia raises interest rates

    Good for Rio Tinto, haha
     
  4. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    The asian nations are rallying to prop up the dollar if it falls anymore the Asian exports are in big trouble, US government has also said they will not be raising interest rates anytime soon, but this has become a dangerous situation if the dollar carry trade is impacted, it could cause a shockwave thru all the global economies and collapse many markets.
     
  5. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    Debunking the Dumping-the-Dollar Conspiracy | Foreign Policy

    For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

    The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

    But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States.

    With the United States' ascendancy as the pre-eminent economic power after World War II, the dollar became the world's reserve currency: Most countries held dollars in reserve in the event that they suddenly needed an asset other than their own currency to pay for imports, or to support their own currency. Much international trade, including trade not involving the United States, was carried through in dollars. In addition, most internationally traded commodities became priced in dollars on exchanges. However, the dollar was never universally used to carry through trade (even trade in oil), and the pricing of commodities in dollars is primarily just a convention.

    Any market -- a stock market, a wheat market, or the oil market -- requires a unit of measure. The importance of the U.S. economy made the dollar the obvious choice for most markets. But there would be no real difference if the euro, the yen, or even bushels of wheat were selected as the unit of account for the oil market. It's simply an accounting issue.

    Suppose that prices in the oil market were quoted in yen or bushels of wheat. Currently, oil is priced at about $70 a barrel. A dollar today is worth about 90 yen. A bushel of wheat sells for about $3.50. If oil were priced in yen, then the current price of a barrel of oil in yen would 6,300 yen. If oil were priced in wheat, then the price of a barrel of oil would be 20 bushels. If oil were priced in either yen or wheat it would have no direct consequence for the dollar. If the dollar were still the preferred asset among oil sellers, then they would ask for the dollar equivalents of the yen or wheat price of oil. The calculation would take a billionth of a second on modern computers, and business would proceed exactly as it does today.

    It does matter slightly that the trade typically takes place in dollars. This means that those wishing to buy oil must acquire dollars to buy the oil, which increases the demand for dollars in world financial markets. However, the impact of the oil trade is likely to be a very small factor affecting the value of the dollar. Even today, not all oil is sold for dollars. Oil producers are free to construct whatever terms they wish for selling their oil, and many often agree to payment in other currencies. There is absolutely nothing to prevent Saudi Arabia, Venezuela, or any other oil producer -- whether a member of OPEC or not -- from signing contracts selling their oil for whatever currency is convenient for them to acquire.

    Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

    By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil.

    This raises a more serious issue affecting the demand for dollars, which is the dollar's status as an international reserve currency. Currently the dollar is by far the preferred currency, but others, notably the euro, are gaining ground. A switch away from the dollar will lower its value, but this is hardly anything to fear: In actuality, it was and is an official policy goal of both the George W. Bush and Barack Obama administrations.

    Both administrations are on record complaining about China's "manipulation" of its currency. China does this by buying up vast amounts of dollars to hold as foreign reserves, suppressing the value of the yuan against the dollar. This, in turn, makes Chinese goods cheaper in the United States and bolsters China's exports.

    If China stopped buying up huge amounts of dollars, as the United States wishes, then the dollar would fall in value against the yuan, thereby making Chinese imports more expensive. The result would be that the United States would buy fewer imports from China, improving its trade balance. Not too many people would be frightened by this prospect.

    To summarize, the dollars needed to finance the international oil trade are trivial compared with other sources of demand for dollars. The currency chosen for foreign reserve holdings can have an impact on demand for dollars, but this has nothing to do with the currency chosen to conduct the oil trade. If Saudi Arabia wanted to hold euros rather than dollars, it could almost instantly offload as many dollars as it desired. Plus, the White House wants the dollar to decline anyway because it would improve the United States' trade balance.

    Thus, the conspiracy theory Fisk resurrected might have spooked the markets, but the reality is that there is nothing to fear. The dollar's value will likely fall over time (as it has been doing against the euro for the last nine years). But there is nothing in the cards to suggest a collapse, even if Saudi Arabia starts selling its oil for euros or yuan.
     

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