The dollar is sliding on the currency markets this morning after reports by the Independent newspaper that Arab states are in secret talks with China, Russia and France to stop using the US currency for oil trading.
The move – if it happens – would be the most profound financial change in recent Middle East history, argues the paper. It would send shock-waves through the international oil market, and change the geo-political landscape. The story, written by the highly respected Robert Fisk, has already led to a rush of denials that this is about to happen.
According to Fisk, “the Gulf states 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.”
Apparently secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil.
Fisk argues that the move could be the precursor to a “future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy.” It also signifies a shift in global supremacy from the US towards China.
One country has already made the change, Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars.
But Reuters has just reported that the United Arab Emirates central bank has come out denying the reports “They are going to stay with the dollar. For so long oil pricing is in dollars and it would be difficult for producing countries to change.”
But such is the way, the very fact that talks are ongoing about maybe dumping the dollar, means that the dollar is now falling. “The very fact that such an idea is being entertained is undermining the dollar,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.
But some analysts believe that the dollar’s long-term future as the currency for oil trading is in serious trouble and will be replaced over the next few years.
“China, Russia and many Middle East countries already have large dollar reserves. They want to stop them getting higher, and may even want to start diversifying them into other currencies,” says David Hart, oil and gas analyst at investment bank Hanson Westhouse.