America’s global financial supremacy hinges on two principal factors:
a) it is the world’s largest economy in terms of buying power; and
b) The U.S. Dollar is the reserve currency of choice for virtually all central banks around the world.
While the likelihood of the US ranking in size of economy is unlikely to be usurped at any point in the near future, the status of the U.S. Dollar as the premier reserve currency is seriously threatened. And that could have serious consequences for America’s lead position in terms of economic buying power.
There are a lot of factors undermining the attractiveness of the U.S. dollar as a currency holding, not the least of which is its stubborn inclination to lose value over time.
Central banks are interested in holding currencies in reserve that have a stable value unlikely to fluctuate excessively. Like any conservative investor, they get nervous when their ‘wealth preservation’ tactics fail.
There are an increasing number of indications that the U.S. Dollar is already being replaced in many historically U.S. dollar transactional processes.
In the Middle East in particular, where the rejection of all things American persists in varying degrees of intensity coincident with Islamic fundamentalism, strong moves away from the dollar are under way.
As Pierre Le Comte, a French financial analyst and supporter of the Campaign "Dette et dollar" (to reject the dollar as world currency) says, "While the rest of the world must toil hard to earn dollars which are needed to buy goods internationally, or to pay off foreign debt, the USA just needs to print dollars"
And as Frédéric Clairmont wrote in Le Monde Diplomatique (April 2003): "Living on credit is the credo of the foremost power in the world".
Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation.
The Government of Qatar increased its gold holdings by a factor of fifteen between April 2006 and April 2007. The central Bank of Qatar is carrying out a reserve diversification policy and stated last year that the euro would be one of the alternative currencies into which it would diversify. Gold is clearly also another element of this program, with the holdings amassed to date amounting to 0.28 million ounces or 8.8 tonnes. At $650/ounce, these holdings comprise 3.4% of Qatar's gold + foreign exchange holdings combined.
Based on the latest figures from the International Monetary Fund, the world average level of gold holdings at the end of April, at $650/ounce, was 10.4%. Stripping out the holdings of the supra-national organizations, then the average holding among the central banks of IMF members was 13.6%.
Meanwhile in the rest of the Middle East, where it must be allowed that information is patchy as some member countries have not reported their gold holding levels for some time, the IMF reports that gold holdings amount to 956 tonnes, and have increased by just over eight tonnes over the twelve months to April, with reactions in holdings reported from "oil-exporting countries" and a small increase in Omani holdings. Middle Eastern holdings overall amount, on the basis of these figures, to seven per cent of the region's total foreign exchange holdings.
At the International Conference on Gold Dinar Economy 2007 held in Kuala Lumpur on July 24th, Former Malaysian prime minister Dr Mahathir Mohamad called on the Islamic world to embrace the use of the gold dinar for international trade and as an alternative to US dollar reserves in central banks.
“This is quite simple. It is nothing more than keeping gold bullions as savings. They can be traded and they retain their value in terms of purchasing power quite well,” he told delegates at the conference held at the Putra World Trade Centre.
“With the usage of the gold dinar, some of the power of the Western banking system and the US dollar would be diminished. With this, the clout of these powerful countries would also diminish. On the other hand by refusing to use the gold dinar, Muslims could be impoverishing and weakening themselves,” he noted.
The euro is gracefully establishing itself as an international reserve currency second only to the US dollar. The more the US dollar falls, the more motivation international central banks will have to diversify their resources away from the US dollar, thus creating additional demand for the euro and additional supply of the USD as a direct result of such portfolio shifts rather than as a result of normal trade flows.
All that being said, OPEC producers still receive 100% of their oil revenues in U.S. dollars, and for mostly political reasons, that is unlikely to change anytime soon.
OPEC members Saudi Arabia, the UAE and Kuwait between them pump about 13.5 million barrels per day of oil, nearly 16pc of the world's supply.
OPEC's second largest producer Iran caused a stir in financial markets when it asked Japanese oil buyers to pay in yen rather than US dollars two weeks ago. That move was in part politically motivated as the row drags on with the US over Tehran's nuclear ambitions.
Libya and sometimes Syria also ask for payments in other currencies, an industry source said. But Gulf producers have shown little interest.
Analysts said it would make economic sense for producers to diversify payment denominations, as it would reduce the volatility associated with the close ties to one currency and better reflect the region's trade relationships.
Anything that weakens the dollar will also hurt the region's massive dollar-weighted investments.
All the major benchmarks that producers use for oil contracts are set in dollars, which also makes it difficult to use any other currencies.
“The potential political fallout from the impact on the dollar of any change would likely keep the region's oil sales in the US currency”, said Steve Brice, regional economist at Standard Chartered.
"The US would probably be concerned about major producers doing this," said Brice.
"The oil market is entrenched in dollars," said one industry source.
"People are buying oil years out in dollars and it is difficult to see any of those people unwinding their positions and buying oil in any other currency."