Update: Central banks are moving away from the greenback as a reserve currency. Bloomberg reports that central banks used the Euro for half their currency accumulations over the spring and summer. The Yen accounted for 12%. The trend away from the dollar appears to be
accelerating, further pressuring the dollar and causing its largest two quarter drop in 20 years. Gold, the other international currency, has now busted its $1000 trading ceiling and projections are for the metal to increase gains, perhaps
to a level of $1500/ounce. Gold has tripled in value over the last eight years. The concern abroad is the fiscal bind that the United States is in. Treasury is offering a record amount of debt to finance this year ($1.4tr), and the economy appears to require yet more fiscal stimulus to recover. With a savings rate near zero, financing is supplied by foreign countries and investors. This situation is causing central bankers and foreign investors to diversify away from the dollar. The falling dollar is good for US exports and makes
paying the debt back cheaper in the short run, until investors begin demanding higher returns to buy dollar denominated notes.
{First post 10.7.09} One of the realities of the current financial crisis is that despite bushel loads of new dollars the Fed is creating to bailout the banks (by one
informed count $17.5 trillion), the United States is being spared a raging case of inflation. This economic paradox is due to the fact that the world does big business in dollars. Besides investing in dollar securities, the world pays for oil in dollars. But the Gulf Arabs are planning to put an end to the greenback as the world's reserve currency by replacing petrodollars with a basket of currencies including gold, the Euro, the Chinese yuan, and the Japanese yen. According to an exclusive story by the British
Independent newspaper secret meetings have already been held by finance ministers and central bank chiefs in Russia, China, Japan and Brazil to work on the scheme
{A New World Money, 3.23.09}. Gold prices have recently surged. The United States will no doubt resist the new tender arrangements since the dollars exalted status as the reserve currency gives it unparalleled fiscal flexibility. US objections will exacerbate relations with the world's emerging superpower, China. China imports 60% of its oil, mostly from Russia and the Middle East. Its exports account for 10% of imports to the Middle East.
China is resolutely backing the new currency arrangement in order to decouple itself from deteriorating US fiscal policy. In a sign of the emerging oil producer revolt against dollar hegemony, Iran has recently announced that its foreign currency reserves will be held in Euros. The current deadline for the currency transition is set for 2018.