Debunking the Dollar-Dumping Hype

Is there anything new to rumors that China, Russia, and the Gulf States are going to stop using greenbacks for oil trades?

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Concerned rumblings about the decline of the dollar as the international currency of choice have a long pedigree. (See reports from 1999, 2003, early 2009). Few would deny it's a real trend, particularly with the head of the World Bank making the same prediction as recently as last week. But the latest news --that China, Russia, and Middle East nations may be plotting to stop using American currency for oil trades--is being greeted with skepticism by some econopundits. Why?

Many argue that the report is thinly sourced, that the news is hardly groundbreaking, and that such a move--if it were true--might be welcome for causing U.S. exports to surge. Though there is still a strain of concern, the overwhelming reaction among financial analysts is that the shift away from greenbacks is slow, inevitable, and somewhat beneficial. Their reactions to the report:

  • If True, U.S. Has Most to Gain From Dollar Decline, says Edward Harrison at Credit Writedowns. "Is it curtains for the US currency? Maintain a healthy dose of scepticism. But, I will say this: if the dollar does decline, Bernanke and the gang will be high-fiving it up and down the corridors of Washington because the dirty little secret is the U.S. wants currency depreciation. Policy makers in America want inflation. This gets them out of a policy cul-de-sac and certainly helps the U.S. to increase savings without government deficits via an invigorated export sector."
  • Not Novel, But It's True That Dollar Is on the Outs, says Yves Smith at Naked Capitalism. "Many US commentators blithely asset that the US does not need to worry about the reserve currency status of the dollar, since there is allegedly no ready substitute. Yet those arguments ignore the fact that there has already been movement away from the greenback...Another chip away at the dollar's standing is a effort underway by the Gulf States plus China, Russia, Japan and France to denominate oil sales not in dollars but a basket of currencies. Note this is not completely novel; Iran's oil sales to Japan are quoted in yen."
  • 'Nothing But Meaningless Hype,' argues Mike Shedlock at Mish's Global Trend Analysis. "The idea is ridiculous. Saudi Arabia, China, Japan, and any other country can hold whatever reserves they want in whatever currencies they want regardless of the pricing unit of oil. Reserves are based on trade relationships not pricing units! Pricing oil in Euros (or even sillier - a basket of currencies) will not cause anything to happen. If pricing unit changes do happen, they will be a result of sentiment changes in regards to existing dollar hegemony and not the other way around. Dollar Armageddon is not coming over a pricing unit, nor did the US invade Iraq for that reason. The story is nothing meaningless hype."
  • Overreacting to a Long-Term Trend, writes Izabella Kaminska at FT Alphaville, offering an extensive rundown of reactions from stock analysts. "As we've stressed, denials have been coming out thick and fast from all the central banks involved. What's more, the concept of pricing oil in an alternative currency to the dollar is hardly a new one." Kaminska highlights reactions from finance professionals: "This is not new news of course, for such a change from dollar pricing to some other methodology has been discussed, rumoured, tossed about for months, but this time we note that Japan and France are involved in the meetings and that changes the tenor of the rumours entirely." Most others wrote variations on this line, proven wise by the decline in the dollar index: "Hardly that surprising."
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