Now that the furor over the US housing crisis/credit crunch has
begun to subside in forex markets, investors have turned their attention to
what is perhaps the second biggest threat to the Dollar’s long term health: the
PetroDollar phenomenon. In short, the
price oil is denominated in Dollars and many oil-exporting nations peg their
currencies to the USD. Having found
themselves awash in cash, such nations are beginning to ponder greater financial
independence from the declining Dollar.
The anecdotal evidence for the declining importance of the
Dollar among oil-exporting countries could not be stronger. Last week, the Forex Blog reported two developments. First, OPEC is considering
altering the way oil contracts are settled, by pricing oil in a basket of
currencies rather than in USD. Next, the
members of the Gulf Coast Council are considering de-pegging their currencies
from the Dollar, due to rising inflation and the increasing opportunity cost of
owning Dollar-denominated assets.
Actual data, on the other hand, suggests that OPEC may be moving
in the opposite direction, towards a greater dependence on the Dollar. The US remains the most popular
destination for petrodollar investments, attracting 55% of all such investment
capital. Europe comes in at a distant second, attracting just 18%. Plus, in the last year, oil money has been
used to make several widely-publicized investments in American investment
groups, including a recent $7.5 Billion investment in Citigroup by the Abu
Dhabi Investment Authority.
The evidence is certainly nuanced. In all likelihood, OPEC will make good on Iran’s failed
attempt to sell oil denominated in Euros by linking oil to a basket of
currencies. In their own words, “oil is
being sold in a currency whose value was eroding by the day.” At the same time, the US is still the
home of the world’s best capital markets, from the standpoint of stability and
risk. Thus, while it’s possible that some or all of the members of the GCC will
de-peg their currencies from the Dollar, any relative decrease in
Dollar-denominated investments is likely to be passive, rather than active.
Original post by Jimmy Atkinson and software by Elliott Back
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