Wednesday, October 07, 2009

Dollar in doldrums

There is a news report in The Independent that the Gulf countries, Russia, China, France, Japan and Brazil (there is a reference to India also) have recently decided to start quoting for oil in non-US Dollar currencies. The oil price will be linked to a basket of currencies including Yen, Yuan, euro, a new unified currency planned for nations in the Gulf Cooperation Council including Saudi Arabia, Abu Dhabi, Kuwait and Qatar and gold.
The authenticity of the report is not yet established. If true, it is a momentous event heralding a revolutionary change. If apocryphal which is more likely, it means that China and perhaps Japan are floating a balloon to test the waters. These two countries will feel the maximum impact of any change in the status of US Dollar. If the dollar is dethroned as the oil currency, it is likely to suffer a precipitous fall in value vis-a-vis other major currencies. Correspondingly, the values of forex holdings of China and Japan will fall by the wayside.
Dollar's status is linked to the puissance of the US as a global power. American GDP is around 14 trillion dollars and China's only 4 trillion. Those who are bearish on dollar argue that China is growing by 10% p.a. as against America's 2% growth and therefore China will catch up with America in economic size. This argument overlooks the imponderables afflicting China including its totalitarian political system and lack of credibility of its statistics and product quality in general. We may not be at an economic crossroads as yet.

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