The Dollar is America’s Achilles’ heel

Published by Online Journal, by Linda S. Heard, November 22, 2007.

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: … (full text).

Comments are closed.