How Low Will The Dollar Go?
Kazinform
Moscow
Tuesday, June 6, 2006
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Many analysts suggest that Saddam Hussein’s switch from the dollar to the euro for oil trading was one of the core reasons for the 2003 U.S.-led invasion. Now Iran, the 2nd largest OPEC producer, is getting ready to open a new oil bourse that will trade in euros. And Venezuela is said to be actively discussing the same move.
“What we are witnessing is a battle for oil currency supremacy..."
Russia too joined the bandwagon. Earlier this month, President Vladimir Putin announced the creation of a Russian bourse trading oil and gas in Roubles. Moreover, the Russian President said that work on making the Rouble an internationally convertible currency would be completed by 1 July 2006, six months ahead of schedule. “The rouble must become a more widespread means of international transactions. To this end, we need to open a stock exchange in Russia to trade in oil, gas, and other goods to be paid for in roubles,” he said.
According to an editorial on the Online Journal, Iran, Venezuela and Russia possess about 25% of the export market in oil. If they stop trading their oil exports for dollars, the U.S. currency will seriously be affected, raising interest rates, increasing the cost of imports in the U.S. and leading to an inflationary economy or a recession. In the short term, the inflationary route always seem to be the less painful, but it would ultimately lead to a crisis of confidence in the U.S. dollar, when traders dump dollars for euros.
“What we are witnessing is a battle for oil currency supremacy. If Iran’s oil bourse becomes a successful alternative for international oil trades, it would challenge the hegemony currently enjoyed by the financial centers in both London (IPE) and New York (NYMEX),” according to an article by William Clark on the Energy Bulletin.
At the same time, some Middle Eastern countries have been switching percentages of their dollar reserves for other currencies. In March, the UAE Central Bank said it was mulling converting 10% of its dollar reserves to euros following the Dubai Ports World debacle. Kuwait and Qatar also hinted they might do the same.
Moreover, the Commercial Bank of Syria has already switched all the country’s foreign currency transactions from dollars to euros after Washington demanded all U.S. financial institutions to end correspondent accounts with Syria.
And last month, Sweden cut its $21 billion foreign reserves, from 37% to 20%, with the euros share rising to 50%, causing the dollar to tumble almost 2% in one week. Announcing its decision, Sweden’s central bank said the move was aimed at stabilizing its foreign currency reserves and reducing volatile currencies.
Iran, Venezuela and Russia’s relations with the United States are tense, and their proposed switch from dollars to euros is thought to be partially, if not wholly, politically motivated. However, if the dollar value falls as a result, then central banks around the world will be left with devalued reserves, and may have to start switching as well.
According to David Smith, economic editor for the Sunday Times, much of the dollar fall is further “prompted by America’s $800 billion current-account deficit.” This deficit isn’t shocking, when more than $280 billion has been spent on the Iraq War and the Bush Administration’s proposed tax cuts which mostly benefit mega corporations and the wealthy.
Gulf states, particularly the UAE and Qatar, are said to be suffering inflationary pressures on their economies due to the weakened dollar and there is debate raging over whether the dirham and the riyal should be released from their longtime hinge to the greenback.
Some economists are also making the case for Gulf currencies to be linked to a basket of foreign currencies instead.
In May, Kuwait, the third-largest Arab oil producer, revalued its dollar-pegged dinar by one percent. According to the Kuwaiti finance minister, the move was aimed at offsetting the impact of the dollar slide on investments and inflation.
According to an article on the Emirates Bank website, written by its general manager, there is a more important issue than the pegging of GCC currencies. “A more important question therefore, may be whether oil exports should continue to be denominated in U.S. dollars,” he says. “This might well be something that OPEC or OEAPC can consider as to the pros and cons but is a matter that is best decided by a dialogue between the importers of oil and the exporters.”
The United States’ aggressive foreign policies have also been one of the main reasons behind the surge in oil prices. If the U.S. launched war against Iran, or interfered in the internal affairs of Venezuela, oil could hit the $100 dollar mark with severe repercussions on the United States and other first world economies.
Iran’s President Mahmoud Ahmadinejad has threatened to respond to any U.S. attack by blocking the Straits of Hormuz; the waterway that links the Persian Gulf with the Gulf of Oman and controls oceangoing traffic to and from the oil-rich Gulf states. And Venezuelan leader Hugo Chavez threatened to halt oil exports to the United States if threatened with invasion.
It’s well known that any trouble in the U.S. economy affects the rest of the world, and this is certainly true when connected to the weakness of the U.S. currency. Last week, London Blue Chips dived due to the weaker dollar and U.S. inflation concerns, while Asian Stocks also felt the pinch.
The United States seems unconcerned, and moreover, it is sending out confusing messages. For example, China was badgered to unpeg the yuan from the dollar, and to revalue the currency so as to give U.S. exports a competitive pricing edge, but since, the U.S. Treasury Secretary John Snow has stated that a strong dollar is in the nation’s interests.
In the meantime, Beijing is buying up Washington’s debt in the form of T-bills; some $200 billion worth. If China decided to abandon the U.S. T-bills, perhaps in response to a row over Iran’s nuclear program or more likely Taiwan, the United States could find itself in trouble.
Meanwhile, the world is watching, hoping that the great powers really know the consequences of their decisions. The questions that should bother us all are how low will the dollar go, and what actions will the U.S. take to stop its slide?
