Status of the Dollar as world currency threatened

Excerpts

"The prominent among countries planning to abandon dollar are Iran, Venezuela, Sudan, Saudi Arabia, Russia, China and South Korea. The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking `appropriate measures' to protect itself from letting the dollar cause problems for their own economy. They are concerned about the threat of inflation and don't want to deal with `recessionary conditions' in the US."

Editorial Comment

This is not a situation brought about by enemies of the US. This is a direct result of US policies themselves. Interestingly the US appears least concerned and is focusing on the opportunity to improve it's exports.
The shift in thinking that is taking place amongst countries with large dollar reserves is one which a decade ago would have been unthinkable. The question is no longer which will be a reserve currency, if not the dollar. The question is does the world need a reserve currency. There are today a lot of currencies which are strong and would be acceptable in a trade transaction. Banking and currency supervision in many countries is today stronger than in the US.
The type of capitalism practiced in the US, is making people realise that this is an opportunistic society who cares for nothing above making money. They are good qualities for a trader but not good qualities for a leader. The dwindling role of the leadership that the US can provide will automatically result in the dwindling role of the Dollar. We are looking today at the real possibility of 2 dollars to the Euro.

Khusro


News:

Status of dollar as world currency threatened

Thursday, November 29, 2007By Sajid AzizKARACHI:

Many economists are seriously thinking over the impact of a weakening dollar on country's economy. One thing is very clear that the already dwindling exports will suffer a major setback in case the US dollar collapses.

Besides economic experts the stakeholders in the forex market too, are really worried over the prevailing situation as the dollar is constantly losing value against Euro and some other currencies. Speculations are rife that a few countries are seriously considering abandoning US dollar as currency of choice for foreign trade. Most of them are oil-producing countries.

"It's no secret that the dollar is on a downward spiral. Its value is dropping, and a number of countries are considering a shift away from the dollar to preserve their assets and how they'll affect its value and the US economy," said a US economist.

The prominent among countries planning to abandon dollar are Iran, Venezuela, Sudan, Saudi Arabia, Russia, China and South Korea. The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking `appropriate measures' to protect itself from letting the dollar cause problems for their own economy. They are concerned about the threat of inflation and don't want to deal with `recessionary conditions' in the US.

Hans Redeker of BNP Paribas believes this creates a "very dangerous situation for the dollar," as Saudi Arabia alone manages $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a `stampede' from the dollar in the Middle East, a region that manages $3,500 billion.

In 2005, South Korea announced its intention to shift its investments to currencies of countries other than the US. Although they are simply making plans to diversify for the future, that does not mean a large dollar drop is not in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.

After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a `nuclear option' of huge dollar liquidation in response to possible trade sanctions intended to force a Yuan revaluation.

Although China "doesn't want any undesirable phenomenon in the global financial order," their large sum of US dollars does serve as a "bargaining chip. As we have noted in the past, China has the power to take the wind out of the dollar," economic analysts say.

Under Hugo Chavez, Venezuela has little loyalty US dollar. It is seriously thinking over trading oil with 12 Latin American countries and Cuba without using the dollar, shorting the US of its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements.

In 2000, Chavez recommended to OPEC that they "take advantage of high-tech electronic barter and bilateral exchanges of its oil with its developing country customers," or in other words, stop using the dollar, or even the Euro, for oil transactions. In September, Chavez instructed Venezuela's state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.

Reports suggested that Sudan is, once again, planning to convert its dollar holdings to the Euro and other currencies. Additionally, they have recommended to commercial banks, government departments, and private businesses to do the same.

In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sanctions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future.

Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the Euro in particular.

Although the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran's intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85 per cent of its oil exports, and has plans to move the remaining 15 per cent to currencies like the United Arab Emirates dirham.

In 2006, Russian President, Vladimir Putin expressed interest in establishing a Russian stock exchange which would allow oil, gas, and other goods to be paid for in Rubles.

Russia's intentions are no secret-in the past, they have made it clear that they're wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairman, Alexei Ulyukayev remarked, "Most of our reserves are in dollars, and that's a cause for concern." He went on to explain that, after considering the dollar's rate against the Euro; Russia is "discussing the possibility of changing the reserve structure.

" Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a Euro alignment. They've discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the Euro, as Russia is the world's second-largest oil exporter.

Although it's not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble, the report added.

But despite all such indicators, some of the economists do not foresee any big threat to the US economy in the near future as the prominent economist, Kaiser Bengali was of the opinion that all such assumptions is an exaggeration as the US dollar is very strong currency."It is true that the US economy will be extremely under pressure and the US government would be forced to cut imports". Bengali further said in such a situation, the economies such as Pakistan would be suffering most as its exports would be reduced massively.