Tuesday, October 6, 2009

Dollar Demise

This article from The Independent entitled The Demise of the Dollar has been circulating around the Asian trading desks tonight. The story, as best as I can tell, is that China, Japan, France, Russia, Brazil, and several Gulf States are secretly meeting to create a new currency basket with the intention of moving crude oil off of USD pricing. Such a move, as the article's headline dramatically implies, would be the end of the dollar's dominance as the premier currency of international trade.

I was a bit torn on whether or not to post anything about it. On one hand, it's getting a lot of traction, (at least in Japan and Hong Kong.) On the other hand, it's sensational journalism - long on alarmism and short on detail. And it's poorly written, to boot. In the end, I decided to outline a few salient points as to why I think this article is bogus.

To wit:

  • There should be no surprise that the major players in the global economy are considering an alternative to the dollar. I'd wager that even the US itself is working out contingency plans for Euro-denominated crude. Given the massive stimulus packages and Wall Street bailouts of 2008 and 2009, the possibility of a significant dollar devaluation is very real. I'd be more shocked if most countries weren't considering the alternatives.

  • China has a huge long USD position through its ownership of US Treasuries. Any drastic move to weaken the dollar is going to hurt China more than it will help.

  • Japan and France are both very strong allies of the US. Japan is not particularly close to China; Russia is not particularly close to France. The Gulf States don't always agree internally, and should not be considered a bloc. Putting together an agreement would not be easy.

  • It's one thing to have governments agree to create a currency basket. It's another thing entirely to get private corporations on board. I'd be a lot more concerned if this consortium included ExxonMobil, BP, and ChevronTexaco.

  • Buried at the end of the article, we learn that the current deadline for this program to be implemented is 2018. That's a long way off, and a lot can change in 9 years.

    I don't really believe that this is a prelude to "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." I do believe, though, that it's another compelling argument for the US to aim for completely renewable energy. Get us off of oil. and the US can let China deal with the Middle East and all its problems.

    It didn't take very long for some cold water to get thrown on this story:

    Japanese Finance Minister Hirohisa Fujii said at a news conference in Tokyo today that he “doesn’t know anything about it,” when he was asked about the newspaper report.
  • No comments:

    Post a Comment