Seven
Countries Considering Abandoning The US Dollar
By Jessica Hupp
08 September, 2007
CurrencyTrading
It’s
no secret that the dollar is on a downward spiral. Its value is dropping,
and the Fed isn’t doing a whole lot to change that. As a result,
a number of countries are considering a shift away from the dollar to
preserve their assets. These are seven of the countries currently considering
a move from the dollar, and how they’ll have an effect on its
value and the US economy.
Saudi Arabia: The
Telegraph reports
that for the first time, Saudi Arabia has refused to cut interest rates
along with the US Federal Reserve. This is seen as a signal that a break
from the dollar currency peg is imminent. The kingdom is taking “appropriate
measures” to protect itself from letting the dollar cause problems
for their own economy. They’re concerned about the threat of inflation
and don’t want to deal with “recessionary conditions”
in the US. Hans Redeker of BNP Paribas believes
this creates a “very dangerous situation for the
dollar,” as Saudi Arabia alone has management of $800 billion.
Experts fear that a break from the dollar in Saudi Arabia could set
off a “stampede” from the dollar in the Middle East, a region
that manages $3,500 billion.
South Korea:
In 2005, Korea announced
its intention to shift its investments to currencies of countries other
than the US. Although they’re simply making plans to diversify
for the future, that doesn’t mean a large dollar drop isn’t
in the works. There are whispers
that the Bank of Korea is planning on selling $1 billion
US bonds in the near future, after a $100 million sale this past August.
China: After
already dropping the dollar
peg in 2005, China has more trouble up its sleeve. Currently,
China is threatening
a “nuclear option” of huge dollar liquidation in response
to possible trade sanctions intended to force a yuan revaluation. Although
China “doesn’t want any undesirable phenomenon in the global
financial order,” their large sum of US dollars does serve as
a “bargaining chip.” As we’ve noted
in the past, China has the power to take the wind out of the dollar.
Venezuela: Venezuela
holds little loyalty to the dollar. In fact, they’ve shown overt
disapproval, choosing to establish barter
deals for oil. These barter deals, established under Hugo
Chavez, allow Venezuela to trade oil with 12 Latin American countries
and Cuba without using the dollar, shorting the US its usual subsidy.
Chavez is not shy about this decision, and has publicly encouraged others
to adopt similar arrangements. In 2000, Chavez recommended
to OPEC that they “take advantage of high-tech electronic barter
and bi-lateral exchanges of its oil with its developing country customers,”
or in other words, stop using the dollar, or even the euro, for oil
transactions. In September, Chavez
instructed Venezuela’s state oil company Petroleos
de Venezuela SA to change its dollar investments to euros and other
currencies in order to mitigate risk.
Sudan: Sudan
is, once again, planning
to convert its dollar holdings to the euro and other currencies. Additionally,
they’ve recommended to commercial banks, government departments,
and private businesses to do the same. In 1997, the Central Bank of
Sudan made a similar recommendation in reaction to US sactions from
former President Clinton, but the implementation failed. This time around,
31 Sudanese companies have become subject to sanctions, preventing them
from doing trade or financial transactions with the US. Officially,
the sanctions
are reported to have little effect, but there are indications
that the economy is suffering due to these restrictions. A decision
to move Sudan away from the dollar is intended to allow the country
to work around these sanctions as well as any implemented in the future.
However, a Khartoum committee recently concluded
that proposals for a reduced dependence on the dollar are
“not feasible.” Regardless, it is clear that Sudan’s
intent is to attempt a break from the dollar in the future.
Iran: Iran
is perhaps the most likely candidate for an imminent abandonment of
the dollar. Recently, Iran requested
that its shipments to Japan be traded for yen instead of dollars. Further,
Iran has plans in the works to create an open
commodity exchange called the Iran Oil Bourse. This exchange
would make it possible to trade oil and gas in non-dollar currencies,
the euro in particular. Athough the oil bourse has missed at least three
of its announced opening dates, it serves to make clear Iran’s
intentions for the dollar. As of October 2007, Iran receives non-dollar
currencies for 85% of its oil exports, and has plans to move the remaining
15% to currencies like the United Arab Emirates dirham.
Russia:
Iran is not alone in its desire to establish an alternative to trading
oil and other commodities in dollars. In 2006, Russian President Vladmir
Putin expressed
interest in establishing a Russian stock exchange which
would allow “oil, gas, and other goods to be paid for in Roubles.”
Russia’s intentions are no secret–in the past, they’ve
made it clear that they’re wary of holding too many dollar reserves.
In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev
remarked,
“Most of our reserves are in dollars, and that’s a cause
for concern.” He went on to explain that, after considering the
dollar’s rate against the euro, Russia is “discussing the
possibility of changing the reserve structure.” Then in 2005,
Russia put an end to its dollar peg, opting instead to move towards
a euro alignment. They’ve discussed
pricing oil in euros, a move that could provide a large
shift away from the dollar and towards the euro, as Russia is the world’s
second-largest oil exporter.
What does this all
mean?
Countries are growing weary
of losing money on the falling dollar. Many of them want to protect
their financial interests, and a number of them want to end the US oversight
that comes with using the dollar. Although it’s not clear how
many of these countries will actually follow through on an abandonment
of the dollar, it is clear that its status as a world currency is in
trouble.
Obviously, an abandonment
of the dollar is bad news for the currency. Simply put, as demand lessens,
its value drops. Additionally, the revenue generated from the use of
the dollar will be sorely missed if it’s lost. The dollar’s
status as a cheaply-produced US export is a vital part of our economy.
Losing this status could rock the financial lives of both Americans
and the worldwide economy.
Leave
A Comment
&
Share Your Insights
Comment
Policy
Digg
it! And spread the word!
Here is a unique chance to help this article to be read by thousands
of people more. You just Digg it, and it will appear in the home page
of Digg.com and thousands more will read it. Digg is nothing but an
vote, the article with most votes will go to the top of the page. So,
as you read just give a digg and help thousands more to read this article.