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The latest dollar rout revealed

The U.S. dollar is getting crushed again today.  I have been waiting to see if and when it hits parity with the Swiss Franc. Today’s action brings us that much closer. The dollar is losing ground against the dollar bloc (Kiwi, Aussie and Loonie) as well as against the Franc and Euro.

currencies-2009-10-06

What gives? Allegedly, a plot by central banks to dump the dollar, according to British daily the Independent.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

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.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

Let’s call this dollar revulsion.  Now, I am sceptical about the authenticity of all of this revulsion.  But, it is having an affect on currency markets.  While I see the U.S. dollar as a weak currency, I am not convinced that anyone (except maybe Iran or Venezuela) thinks it is in their best interest to provoke a disorderly depreciation. The Chinese, with their $1 trillion in reserves, have a vested interest in preventing a disorderly move away from the U.S. currency.

Nevertheless, people are talking. FT Alphaville reports Jim Grant taking this very seriously:

This is not new news of course, for such a change from dollar pricing to some other methodology has been discussed, rumoured, tossed about for months, but this time we note that Japan and France are involved in the meetings and that changes the tenor of the rumours entirely. Too, the addition of the Saudis and the Emirates AND Kuwait to the meetings adds further importance and seriousness to the threats…

The article in The Independent becomes quite serious in that The Independent has not been given to such rumours in the past. This is not The Sun, nor the NY Post.

Is it curtains for the U.S. currency?  Maintain a healthy dose of scepticism.  But, I will say this: if the dollar does decline, Bernanke and the gang will be high-fiving it up and down the corridors of Washington because the dirty little secret is the U.S. wants currency depreciation. Policy makers in America want inflation.  This gets them out of a policy cul-de-sac and certainly helps the U.S. to increase savings without government deficits via an invigorated export sector.

Who hates this: the Swiss especially (see here and here).

Stay tuned.

See also: Plans to Move Away From Dollar Pricing of Oil – Naked Capitalism

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

8 Comments

  1. Zac says:

    Or insiders know results next week