Is The U.S. Dollar Under Attack?
by Hiland Doolittle
Britain’s newspaper, The Independent, reported on Tuesday that Gulf Arab states, Japan, Russia, China and France were negotiating behind the scenes to replace the U.S. dollar with a basket of currencies in future oil trades. Citing unnamed Gulf Arab and Chinese banking sources, reporter Robert Fisk’s articles caused a sharp upturn for the Euro, which edged as high as $1.4749 in European trading before the report was discredited.
The tenuous dollar still gave way to the Euro, which settling at $1.4701 against the dollar. The weaker dollar and anticipation about Wednesday’s U.S. earnings reports sparked another strong rally in U.S. equity markets. By Tuesday afternoon, Gold cleared the $140.00 barrier and hit an all-time high as U.S. equities rose another 131 points.
Fisk’s story set off a firestorm of public and private reaction. The report was quickly denied by Algeria, Russia, Saudi Arabia and the United Arab Emirates. Muhammad al-Jasser, Saudi Arabia’s head of the Central Bank labeled the report, “absolutely incorrect.”
Russian finance minister Dmitry Pankin added; “We did not discuss this at all.” While the story seems baseless, there is a general uneasiness about the reeling dollar. Stretched by abundant forms of quantitative easing and with overwhelming trade and budget deficits, the American dollar remains under pressure.
Meanwhile, other economies appear to be forging their way out of the recession. The concern is that the U.S. is headed for another downturn before the recovery gains a foothold.
Fisk’s report mapped out a strategy that crude oil trading would convert to a basket of currencies including the Japanese yen, the euro, the Chinese yuan and a new, unified currency of the Gulf Cooperation Council within nine years.
IMF in Istanbul
On several occasions, Russia and France have publicly encouraged a shift away from the dollar for oil trading. The currency’s volatility has also caused China, the holder of the largest foreign exchange reserves, to support a change.
While the talks among IMF members have been addressing global trade imbalances, the key to sustained balance may well be the further devaluing of the dollar. David Moore, a commodities expert with the Commonwealth Bank of Australia explained; “I don’t think we will see much concrete action out of such discussions because even when the dollar is weak, it doesn’t mean that commodities are undervalued. In fact, when the dollar weakens, commodity prices tend to increase by a higher ratio.”
Such a conversion presents many practical issues. Many financial ministers agreed that it is already difficult to convert to a single currency much less a handful of options and conversion rates.
Several analysts countered by pointing to Iran as an example of a country that has been able to make a fairly seamless transition away from the dollar. However, most analysts thought the process more laborious than worthwhile.
Strong Message From Australia
The Reserve Bank of Australian (RBA) sent a clear message that the country has emerged from the recession by increasing its cash rate by 25 basis points to 3.25 percent. The Bank indicated more increases were in the offing.
The Australian dollar immediately jumped to a 14-month high. Asian currency banks seemed to be ready for strong moves as several economies moved to pull back from quantitative easing.
The surprising move by the RBA made Australia first Group of 20 bank to hike rates. The bank indicated a desire to increase rates to 4 percent over the next few quarters and hopes that rate would reach 5 percent by 2011.
The Australian economic recovery and real estate markets have been bolstered by the country’s strong banking presence. Treasurer Wayne Swan said: “The Australian economy is outperforming other advanced economies and I guess many economists will see the decision today as a consequence of economic recovery.”
Tags: 2009 Stimulus Package, Australian Dollar, Bailout, Bank of England, British Pound, Consumer Confidence, Currency Trading, Deflation, depression, dollar, ECB, Economy, Euro, Euro Zone, European Central Bank, Forex Commentary, Forex Market, gbp/usd, GDP, interest rates, recession, Stimulus Plan, Swiss Franc, trade balance, US Dollar, US GDP
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
