Report: Oil Producers Plot Demise of Dollar

posted at 5:19 am on October 6, 2009 by Michael van der Galien
[ Economics ]   

The world’s oil producers, as well as China and France, are planning to end using the dollar as the currency to buy and sell oil, British newspapers report.

The move would see oil priced not in dollars but in a unit based on a basket of currencies including the Chinese yuan, the Japanese yen, and a new currency intended for use by the Gulf emirates, according to a report in Tuesday’s Independent newspaper. The paper added that the transistion from the dollar to a new currency will take almost a decade.

Finance ministers and central bankers have held meetings in Russia, China, Japan and Brazil to discuss the idea, which the Americans are aware of, the Independent said.

“Eventually there will be a move to non-dollar commodity contracts, and it may be the next big risk for the dollar,” Ben Simpfendorfer, chief China economist for Royal Bank of Scotland, told Bloomberg. “At the same time, I don’t want to overplay the importance of the story. There’s no credible sources there.”

The financial crisis has intensified speculation about the eventual demise of the dollar as the world’s reserve currency. In the last six months, Russia, Brazil, India and China have already discussed buying each other’s debt as a way of cutting their dependence on the dollar, while the United Nations last month proposed a new global currency to replace the greenback.

Europeans have talked about dropping the dollar for years, decades even. This for a couple of reasons: being dependent on foreign currency is seldom a good idea, the dollar may not be very stable in the long term and, of course, because of Europe’s own ambitions.

Although the report says that there aren’t many credible sources to back the story up, I’m inclined to believe it to be correct. The dominant role of the dollar has been under pressure ever since China’s economy boomed and the formation of the euro.

As said, we Europeans have talked about replacing the dollar with a different currency as reserve for years now. We couldn’t do much, however, because we were standing alone. However, China’s fears over the fate of the dollar have increased recently. It fears that ‘America’s combination of record low interest rates and a policy of printing money will spark a sharp decline in the currency.’ Because China is America’s biggest international creditor, its concerns should be taken serious.

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