Dollar
Is America's Achilles' Heel
By
Linda S. Heard
23 November,
2007
Online
Journal
Dump
it or stay with it is a question being mulled over by private investors,
financial institutions, major corporations and central banks around
the world in relation to the weakened US greenback.
On Sunday,
it was the turn of the Organisation of Petroleum Exporting Countries
(OPEC).
Speaking
at a press conference following the recent OPEC meet in Riyadh, Iran's
President Mahmoud Ahmadinejad said all member states are concerned about
the falling US currency and have asked their finance ministers to study
the feasibility of selling oil in another currency.
However,
OPEC's official communique omitted to mention any such intention, probably
due to Saudi Arabia's determination to not rock an already capsizing
boat. It's interesting to note, though, that for the first time Saudi
Arabia declined to cut interest rates in concert with the last Federal
Reserve decision.
It is certainly
a dilemma for oil-producing nations. Sticking to a currency in decline
doesn't appear to make financial sense on the surface, but were they
to change, say, to euros there is a good chance the dollar would collapse
causing chaos in world markets and a possible global recession.
The GCC must
make similar decisions over the dollar peg with the exception of Kuwait,
which unilaterally made the switch earlier this year and has since seen
its currency revalued upwards by 4.5 per cent.
The peg has
served GCC nations well for decades but is now triggering inflation
due to the high cost of imports. It is also distressing the workforce,
whose income in real terms is diminished. This is especially worrying
for expatriates with financial commitments in their home countries,
such as mortgages or a need to support dependants.
Last week,
the governor of the UAE Central Bank, Sultan Bin Nasser Al Suwaidi,
hinted that the Emirates may instead link the dirham to a basket of
currencies that would also include the dollar. "It's not my prediction
but everybody is expecting that the US dollar will go down further.
It will trigger a review," he said during a visit to South Korea.
Previously,
Al Suwaidi has indicated the UAE would not move without a consensus
from its fellow GCC partners, but there is a general impression that
Saudi Arabia, Bahrain, Qatar and Oman are reluctant to alter the status
quo. Eventually the UAE will have to decide whether to bite the bullet
or go it alone.
Although
the discussions conducted by Gulf countries over whether to discard
the petrodollar and delink GCC currencies from the greenback are pragmatically
focused on economics, this isn't the case for all OPEC members.
Iran and
Venezuela, for instance, view the dollar as a symbol of American hegemony
and are keen to do away with it for primarily political reasons.
Vulnerability
The fact that such a debate is underway illustrates America's vulnerability
and at the same time the clout wielded by oil producers should they
choose to use it to influence US foreign policy.
For instance,
the Arab world may not have a nuclear bomb but it does have the wherewithal
to bomb the American economy. In this case, staying with the dollar
ensures they always have a bargaining chip when push comes to shove.
China is
similarly placed due to its massive holdings of US Treasury bonds, estimated
at $800 billion. Irritated by US pressure to revalue the Chinese yuan,
earlier this month two Chinese officials warned the US State Department
that China possessed the "nuclear option" to offload its US
dollar denomination assets.
And even
though most Western economists believe such a step would similarly hurt
China, even its mention set off a dollar slump.
Other countries
planning to diversify their dollar holdings include South Korea, Sudan,
Venezuela, Japan and Russia, which has ambitions to open an oil bourse
trading in rubles. Italy, Switzerland and Sweden have already made adjustments
to their foreign exchange reserves.
US influence
is further being eroded in South America by Venezuelan-led plans for
a new bank -- Banco del Sur -- that would eliminate the region's dependency
on the World Bank and the International Monetary Fund; institutions
that the Venezuelan President Hugo Chavez refers to as "tools of
Washington".
The six other
founder nations are Argentina, Bolivia, Brazil Ecuador, Paraguay and
Uruguay, which may soon be joined by Chile, Colombia, Peru Guyana and
Surinam.
If Latin
American countries move out of their current holdings of US Treasury
bonds -- estimated at around $500 billion -- the impact on the dollar
could be enormous.
Billionaire
investor Jim Rogers, chairman of Rogers Holdings and a former partner
of the man with the Midas touch, George Soros, recently warned, "If
you have dollars, I urge you to get out. That's not a currency to own."
He may be right.
There's a
message here. The US may be the most militarily powerful and technologically
advanced country in the world but even a roaring giant can be stopped
in its tracks when he's hit where it hurts the most in his pocketbook
and especially when that pocketbook is also his Achilles' heel.
Linda
S. Heard is a British specialist writer on Middle East affairs.
She welcomes feedback and can be contacted by email at [email protected].
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