The Long Farewell to the US dollar

This is from the straightgoods site. It will be some time yet before there is any significant movement towards replacing the US dollar. THe US still is the world master in terms of military and political power but as the article points out some changes are already taking place. Iran has set up an alternative arrangement where oil is not traded in US dollars but Euros and other countries too are demanding euros.
The situation is not all bad for the US since exports will be more competitive.

The long farewell to the US dollar

World looking for new reserve currency as US dollar collapses.

Dateline: Sunday, December 02, 2007

by Gwynne Dyer

It's just straws in the wind so far. India's Ministry of Culture announces that foreign tourists can no longer pay in dollars when visiting the Taj Mahal and other heritage sites; they have to pay in good, hard rupees. Iran and Venezuela call for a joint OPEC statement on the weak US dollar, and Saudi Arabian Foreign Affairs Minister Saud Al-Faisal warns that any public reference to the US dollar's problems could cause the troubled currency to "collapse". Rap star Jay-Z's latest video shows our hero flashing a wad of euros, not dollars.

Only straws in the wind, but all in the past couple of weeks. For the majority of Americans who do not travel abroad, the only visible effect so far of the dollar's steep fall has been higher fuel prices at the pump. The Chinese imports that fill the big-box stores still cost the same, because the Chinese yuan is still pegged to the American dollar. But that may be about to change, along with many other things.

At the beginning of 2003, one euro bought one US dollar. Eighteen months ago, it bought $1.20. Now it is pushing $1.50, and there is no reason to think that it will stop there. Three of the world's biggest oil exporters, Iran, Venezuela and Russia, are demanding payment in euros rather than US dollars. Last week a Chinese central bank vice-director, Xu Jian, gave voice to the suspicion of many others, saying that the US dollar was "losing its status as the world currency."

If that happens, then America loses a great deal. Other countries have to maintain large reserves of foreign currencies — most of which they keep in US dollars — to cover their foreign debts, but the United States can pay its huge foreign debts in its own money. If necessary, it can just print more dollars. Having their own money as the world's reserve currency confers advantages that Americans would miss if they lost them.

The main reason for the collapse of the US dollar is President George W Bush's attempt to fight expensive foreign wars while cutting taxes at home. This involved deficit financing on a very large scale, and inevitably the value of the dollar began to fall — slowly at first, but with increasing speed as it became clear that the White House did not care. "Ronald Reagan proved that deficits don't matter," as Vice-President Dick Cheney told then-Treasury Secretary Paul O'Neill.

But they do matter to foreigners. As the US dollar fell in value, the price of oil (which is usually calculated in dollars) rose to compensate for it, but there was no comparable adjustment for foreign central banks that had huge amounts of US dollars in their reserves. China, which was sitting on about a trillion US dollars, simply lost several hundred billion as the currency's value fell. So various central banks started wondering if they should diversify their reserves, and some acted on it....

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Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.

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