Led By the Dollar, Fiat Currencies Will Continue To Approach Zero

The Federal Reserve Dollar may be in for another big punch. Gulfnews banking editor Babu Das Augustine has raised the possibility that OPEC may switch from dollars to another currency, furthermore reducing the demand for the Dollar which gets shunned by more and more oil producing countries. Iran only accepts Euros or Yen and Venezuela dumped the greenback while countries in the gulf region move their funds away from it too.

According to Das Augustine:

Asset diversification by the Gulf sovereign wealth funds and the possibility that the Organisation of Petroleum Exporting Countries [OPEC] will change the pricing of oil from the dollar to another currency could mean more trouble for the dollar.

Quatar and Vietnam announced only a few days ago that they were shifting away from the ailing greenback as well.

Analysts see the admission by Qatar as a signal that regional state-owned funds are moving away from the dollar.

Qatar has admitted that its investment fund has been diversifying their portfolios to compensate for the decline of the dollar. It would be naive to think that other Gulf funds are loyal to the dollar at the cost of heavy portfolio losses," said a Dubai-based investment banker.

During the past 12 months, companies, mainly state-owned investment arms and private equity firms from the GCC, have quietly acquired more than $50 billion in assets worldwide with Asia's and Europe's shares together accounting for more than 55 per cent.

The state-owned Kuwait Investment Authority, with assets of more than $150 billion, last year increased the Asian share of its portfolio to 20 per cent from 10 per cent.

Although gulf central banks have been discussing asset diversification in the past two years, there hasn't been any evidence of a major shift. The size of assets held by Gulf central banks are relatively small compared to the funds managed by the state-owned investment funds.

According to IMF estimates, global investment funds managed by governments control an estimated $2.5 trillion, outstripping hedge funds. Morgan Stanley estimates these assets could rise to $12 trillion by 2015, roughly the size of the US economy. Gulf countries account for a major share of these funds.

Currency market analysts believe that the gulf sovereign funds' gradual move away from the dollar is a precursor to OPEC opting for a different currency in which to price oil.

"If the dollar were to lose its lustre as a reserve currency this could prove disruptive to the global financial system," Merrill Lynch said in a research note.

"Pricing oil in dollars might have made sense when there was a paucity of other relatively stable currencies and when the Middle East imported more from the US - but not any-more," said an analyst.

I guess it is safe to say that the exodus from the first completely unbacked reserve currency in the world's history has begun - and will not stop. A strong reason for this is the fact that the USA has very little to offer in terms of sought-after export goods besides weapons, aircraft and gas guzzling oversize cars whose low MPG ratios can only be afforded by oil producing countries anymore.

Anybody counter my bet that another fiat currency experiment will be coming to an end in the next decade?

Before you lose your money, remember that ALL fiat currencies of the past 350 years have returned to their intrinsic value. Gold has NEVER lost its value in the past 3,500 years!

For some background about the role of the Federal Reserve Dollar in commodities markets click here.

Comments

[vineet:]

In the last 10000 years, ordinary wood, iron, or copper never lost their value either. Therefore, hold wood, iron and copper and play world financial market by currency backed by these natural substances. ha ha ...

The current peril is of adjustment in currency, goods and services produced and consumed with traders playing a role of hype [fear or good time]. Though, the US economy size is about 50% of the total global economy, never over estimate the economy of China, India, and many other touted countries; because they are driven by the US and do have a very small, almost insignificant internal yesteryear economy. It is more noise by traders of shift etc but a shift will bring even more destablization then stability either be it Euro or Yen or Russian Rubble.
The sub-prime woes and pain are wide spread including economies in Euro.

2007 Oct 08 05:01 PM

[ottorock:]

I own a 1933 US silver dollar. when it was minted the silver content was worth exactly that; 1 dollar.

From that time until now, the US dollar has lost 92% of its value. Therefore by your argument I should have rejected the dollar for the whole of the 20th century...luckily I didn't!

You give goldbugs a bad name.

2007 Oct 08 05:40 PM

[Brian Davis:]

Ron Paul is the only cantidate with a clue on this one. WWW.RONPAUL2008.COM

2007 Oct 08 06:13 PM

[ussmls7:]

If you dont have phyical silver or gold, even copper pennys may be worth more than a US DOLLAR. Hope you planed ahead. If only the ones that stop the use of our own natureal resourses would open there eyes, we would not need oil from the middle east. Al Gores big lie will come back to bite the ones that took it , line , hook & bankrupt.

2007 Oct 09 01:27 PM

[Sr. Pessimist:]

Watch most of the upper class of America fall to their demise.

2007 Oct 10 01:03 AM