Many states plan to switch their dollar reserves to euro
By Syed Rashid Husain
RIYADH, Dec 23: Oil rules geo-politics, the old cliché says and how true indeed!
Banking on its oil riches, Iran is attempting to challenge the established world order, endeavouring in the process to engineer a revolution of mammoth order. By announcing to switch over to euro for its oil sales, Iran is treading into murky-rather-dangerous waters.
Many decades ago the dominance of the greenback was often referred to as ‘dollar diplomacy.’ Since the fall of the Soviet empire in 1989 the policy evolved into what had often been termed as ‘dollar hegemony.’
When ‘shock and awe’ got underway against Baghdad, some analysts asserted it was not about Saddam’s nuclear ambitions or the alleged link to the Al-Qaeda network, it was about defending the dollar, for Saddam had decided to switch over to euro as the currency of its oil trade. Years later when Iran simply threatened to go the same course, it was added to the “axis of evil”. The defence of the dollar is almost as important as oil, many underline.
The US today dominates the world economically and militarily and one tool used to great effect to sustain this US domination has been the dollar. Oil, the world’s largest tradable commodity, is traded in greenback. This arrangement also means that the US effectively part-controls the global oil market: one could only buy oil if one had dollars, and only one country had the right to print dollars - the US.
And the more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars.
Hence when earlier this week, Iran announced ordering its central bank to direct foreign transactions, including oil trade in euro and transform the state’s dollar-denominated assets held abroad to the single European currency, it could hurt the cozy arrangement.
If Tehran succeeded in its ambitions, it might push others too in the same direction – signalling the demise of dollar as the currency for energy trade. Many say it could ultimately bring to an end the era of what was has often been termed as the ‘American Century.’
With heightened concerns among the oil producers’ on the weakening dollar and its impact on their oil earnings, the prospect also offered an economic logic.
Hence only a day before the Iranian announcement to convert its dollar-denominated assets into euros, Sultan Nasser al-Suweidi, the** United Arab Emirates** ’ central bank governor, said that they were waiting for a clear trend to emerge before converting their reserves into euros or any other currency.
The bank holds 98 per cent of its reserves currently in greenbacks but plans reducing its dollar holdings to between 50 and 90 per cent. Last month al-Suwaidi, said he was evaluating when to shift as much as 8 per cent of the nation’s $24.9 billion in reserves into euros.
President Chavez is taking measures to ensure that a growing share of the country’s oil profits are deposited into euros as the dollar depreciates.
Meanwhile, Bank Indonesia’s senior deputy governor, Miranda Goeltom, said last week that the Jakarta-based central bank, with $39.9 billion in reserves, was boosting its euro holdings.If the trend catches up, this is a recipe of disaster for the US. It may not be easy for Washington to swallow it. With the sidelining of the dollar, not only would the US lose a large part of its annual subsidy of effectively free goods and services, but countries switching to euro reserves from dollar reserves would also help bring down the value of the greenbacks too.
The Federal Reserve would no longer be able to print more money to deflate the bubble, as it is currently openly considering doing so. Indeed without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.
http://www.dawn.com/2006/12/24/ebr20.htm
The gradual downfall of the U.S?