Farewell to the US Dollar

At the beginning of 2003, one euro bought one US dollar. Eighteen months ago, it bought $1.20. Now it is pushing $1.50, and there is no reason to think that it will stop there.

Three of the world's biggest oil exporters, Iran, Venezuela and Russia, are demanding payment in euros rather than U.S. dollars. Only straws in the wind, but all in the past couple of weeks.

For the majority of Americans who do not travel abroad, the only visible effect so far of the dollar's steep fall has been higher fuel prices at the pump. The Chinese imports that fill the big-box stores still cost the same, only because the Chinese yuan is still pegged to the American dollar. But that may be about to change, along with many other things.

The main reason for the collapse of the U.S. dollar is President George W. Bush's attempt to fight expensive foreign wars while cutting taxes at home. "Ronald Reagan proved that deficits don't matter," as Vice President Dick Cheney told then-Treasury Secretary Paul O'Neill.

But they do matter to foreigners. As the U.S. dollar fell in value, the price of oil (which is usually calculated in dollars) rose to compensate for it, but there was no comparable adjustment for foreign central banks that had huge amounts of U.S. dollars in their reserves. China, which was sitting on about a trillion U.S. dollars, simply lost several hundred billion as the currency's value fell. So various central banks started wondering if they should diversify their reserves, and some acted on it.

Many countries are replacing part of their dollar reserves with a basket of other currencies, and those who have pegged their currency to the dollar are starting to cut loose from it: Kuwait has already done so, and the United Arab Emirates is actively considering it. If China unpegs, things will move a lot faster, but in any case the long farewell of the U.S. dollar has begun.

[Excerpt of article by Gwynne Dyer, Salt Lake Tribune]

The Dollar's double Asian blow

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that other Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.

Vietnam is seen as weather vane for the bigger Asian powers. Asia together holds over 65 per cent of the world's total. The concern is that once one or two members of the region jump ship, it could set off a broader scramble.

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings from 99 per cent to 40 per cent, switching into investments in China, Japan, and emerging Asia. The move can easily be seen as a vote of no confidence in US economic management.

Last month, Saudi Arabia set off jitters in the currency markets when it decided not to cut interest rates in lockstep with the US Federal Reserve, raising doubts about its commitment to the Saudi dollar peg.

Kuwait has already abandoned its dollar peg, fearing that its economy would overheat if it continued to import America's loose monetary policies.

Separately, Iran said it would soon refuse to accept dollars for its oil exports, preferring to be paid in a "more credible currency".

If a number of OPEC suppliers began demand long-term futures contracts in euros instead of dollars, this would have an impact over time.

Hans Redeker, currency chief at BNP Paribas: “OPEC and Asia have been the two blocks funding the US current account deficit."

[The Telegraph]