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Will the dollar crash? 10/6/2009 7:23:20 AM
China, Russia, Japan and several of the most powerful Gulf States are actively plotting to end the decades-old practice of buying and selling oil in dollars... Is the US currency to be replaced for trading oil by a basket of currencies, including the Japanese yen, the Chinese yuan, the euro, gold and a new, single currency for the Gulf states?
If executed, the move would be a significant blow to the dollar's position as the premier world currency and would potentially threaten America's position as the world's leading economy.
According to the Independent, gold could be used as a temporary replacement for the dollar while the new currency basket was implemented.
"Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars," it claimed.
Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018."
The dollar fell by around 0.4% against a basket of other currencies following the report. This pushed gold to a new all-time high of $1,035 per ounce.
Analysts believe that the dollar's long-term future as the currency for oil trading is indeed in doubt.
China, Russia and many Middle East countries already have large dollar reserves. They want to stop them getting higher, and may even want to start diversifying them into other currencies.
For years, economists have speculated about how long oil would continue to be traded in dollars. Critics argue that the current system is flawed; oil importers are forced to buy dollars to pay for their fuel, while exporters are left with billions of dollars which they often hold in reserve or reinvest in the US economy. The result, they say, is that the dollar's position as the global reserve currency is reinforced. Thus, the US economy is supported as any devaluation would cause damage across the world. Most of China's $2tn (£1.24tn) of foreign currency reserves are in dollars, for example..
Bilateral trade between China and these other countries is growing, so you can see why there is interest in matching up the currencies, if China and Russia are trading oil, why would they want to do that solely in dollars? It would also mean that America would probably then be forced to raise interest rates to make its US Treasury bonds more appealing to investors.
In 2000, Iraq broke away from the dollar's dominance and began selling its oil in euros.
