This Robert Fisk article has caught a lot of attention today. In the article, titled “The Demise of The Dollar”, he argues that the Gulf Arabs along with China, Russia, Japan, and France, are planning to end dollar-denominated oil contracts. And instead move to a basket of currencies.
The article first caught attention in Asia’s early morning trading and the dollar weakened as a result against the major currencies. It plays to longstanding fears that the dollar’s credibility as a global reserve currency is fading as a result of the economic crisis.
I made some comments to Bloomberg and later put out a report to clients. I can’t post the report here. But I’m not convinced by the article as it doesn’t quote credible sources. Moreover, the Gulf countries are also unlikely to change their dollar pegs in the short-term, while their security ties to the U.S. are a constraint on their views towards the dollar, albeit these restraints have eased in the past ten years.
Nonetheless, I’m still a big believer that China, in particular, will “eventually” trade non-dollar denominated commodity contracts. It has a strategic interest in pricing commodities in its own currency. I wouldn’t expect the Middle East to be the likely first candidate. But certainly Africa and other emerging countries, short of cash and trying to attract Chinese investment, are likely choices.
But, and most importantly, what the article does unintentionally underscore is the Middle East’s importance in determining the fate of the dollar. As the world’s largest oil supplier, any decision to move away from dollar-denominated contracts would have important implications for the future of the dollar. I’m left wondering how that limits the United States freedom to act in the Middle East?
