The demise of the dollar

Geriatrix

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http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
By Robert Fisk
Tuesday, 6 October 2009

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.
 

PeterCH

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I am very sure the Chinese want a strong yuan and Euro a strong Euro.
The YEN is already terribly high and I'm sure the Japanese want that higher too.
 

LazyLion

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Hmmm, so printing all that extra money in the US turned out to be a dumb idea! Who woulda thunk it?
 

PeterCH

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Hmmm, so printing all that extra money in the US turned out to be a dumb idea! Who woulda thunk it?

Printing that money is how China got too big for its boots.

US outsourced production to China. China gets rich. China does not buy US products though. US has to print dollars since these stay in China.

Who's to blame here?

Obviously the Yuan can appreciate to 1:1 parity with the US Dollar. You can now pay 7x more for that piece of .... Chinese TV set.
The US needs to have less reliance on Middle East Oil.
Japan needs to start to defend itself from China and NK.

Result - China goes back to rice production in the long run. I don't know what they will do about the 300 million people over 80, let them die I guess.
Middle East returns to its nomadic way of life - that will happen when the oil runs out. Mr Sheik won't have his $100,000 SUV anymore and can go back to his 'special' camels.
Japan's deficit grows and they beg US to save them again from CHina although with China now cultivating rice maybe that won't be necessary.
 

zippy

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Still doesnt change the fact that without the American consumer, the world economy would be rubbish. This is probably more of an issue to people outside of America, than in America. Most Americans would welcome a weaker dollar as it makes their exports more competitive. Let the Chinese share some of the risk for a change. Overall, this can only be a good thing for the world's economy.

Also keep in mind that Robert Fisk is not exactly the most unbiased journalist when it comes to the USA. He hates them more than Bin Laden does.
 

Ou grote

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What's this going to the price of the Big Mac?

Time to nuke those arabs.
 

BBSA

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The notion is hardly new and has been periodically raised, and frequently dismissed.

A report on Tuesday in the Independent newspaper revived the idea of ending a huge volume of trade of the world's most liquid commodity -- oil -- in the U.S. dollar, a potentially major sign of the greenback's fading status. Quoting unnamed sources, including Gulf Arab and Chinese banking sources, the paper reported that Gulf Arab states were in secret talks with Russia, China, Japan and France "to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf."

That appeared to suggest the easier of two ways to break the oil/dollar link: ending the use of the dollar as the currency used to settle oil trades between countries or between companies, an important function but essentially a treasury operation, one that Iran, for instance, has already undertaken.

The much more difficult task would be to replace the currency in which oil is priced: the U.S. dollar, the currency that underpins benchmarks from New York to Dubai to Singapore, and which would require a massive effort to change.

In other words, if the plan materializes, it could be major news for forex markets by allowing oil exporters to more easily diversify their currency reserves and remove the need for importing nations to buy dollars to pay for their oil, but would appear unlikely to revolutionize oil trade.

The notion is hardly new and has been periodically raised, and frequently dismissed, during the dollar's long slide this decade, particularly with increased discussion about a shift toward a new global reserve currency.

Although an increasing share of global commodity trade is being settled between counterparties in non-dollar currencies, that's a far cry from changing the dollar-denominated markets that establish the underlying prices for those trades, even within the nine-year time frame that the paper cited.

* BENCHMARK BLOCKER

Beyond the strong political alliances between major Gulf exporters and the United States, there are deep logistical reasons to mitigate against a major shift in the basis currency for oil trade away from the U.S. dollar.

Despite the Gulf's role as the swing oil supplier to the world -- and China's status as the fastest-growing consumer -- the most liquid market for oil remains the New York Mercantile Exchange, followed by the London-based Brent contract.

Even the Oman crude oil futures contract launched two years ago in Dubai is traded in dollar terms.

Unless Gulf nations are prepared to remove restrictions on the free trade of their crude oil exports -- allowing them to become benchmarks for the rest of the world, as some analysts have argued would be useful -- it will be difficult for them to influence the basis currency for global oil.

Although commodity exchanges in both Japan and China offer local currency-based oil futures, they are ultimately linked back to regional benchmarks denominated in U.S. dollars.

* CONVERTIBILITY ISSUE

The fact that China's yuan and many Gulf currencies are not fully convertible is also a significant obstacle to any effort to replace the dollar in global commodity pricing.

* IRAN EXAMPLE

Iran, the most virulently anti-dollar nation in the region, has notched up some modest success in reducing its involvement with the greenback.
Two years ago it asked its Asia customers to settle their oil trades in non-dollar currencies; after a few months of debate, most complied. But still Iran sets its export prices based on a formula linked to dollar-denominated benchmark crudes.

Iran has pushed for the Organization of the Petroleum Exporting Countries to switch from the dollar when calculating international oil prices, though it has so far received little support for the initiative.

Link
 

Alan

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Also keep in mind that Robert Fisk is not exactly the most unbiased journalist when it comes to the USA. He hates them more than Bin Laden does.

Yeah tinfoil hat time. This nutcase and the rabid leftist rag the 'independent' are just wishing for this to happen as per usual. Unfortunately for them it's all in their head.
 
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