Thursday 8 October 2009
No sense in report of plot to engineer US dollar’s demise
That’s not to say the US currency won’t be deposed one day. But it is a safe bet it won’t be replaced any time soon by anything resembling Fisk’s basket. He might be an acknowledged expert on the conflicts of the Middle East, but it looks like Fisk’s lost the plot on this one.
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No sense in report of plot to engineer US dollar’s demise
Tom Holland
07 October 2009
Robert Fisk is one of the best-known newspaper correspondents in the world. In more than three decades of reporting from the Middle East, he has covered countless wars, from the 1982 Israeli assault on Lebanon to the 2003 US invasion of Iraq. He has even interviewed Osama bin Laden - three times.
Over the years, he has collected a whole shelf-full of journalism awards, and been condemned countless times for his lack of impartiality. Today, his dispatches for London’s Independent newspaper are read avidly across the Arab world, and reviled by many in Israel.
Few journalists are as controversial, and even fewer share his ability to pull a crowd. Last month, he appeared as a keynote speaker at CLSA’s annual investor conference in Hong Kong, where he scored a minor scoop as the only reporter allowed in the room when the top-billed attraction, former US vice-presidential candidate Sarah Palin, delivered her first speech since stepping down as governor of Alaska earlier this year.
But although he might be an expert on Middle Eastern conflicts, Fisk is less sure-footed when it comes to international finance. In a front-page article in yesterday’s Independent, he reported a secret plot by the Arab countries of the Persian Gulf, together with China, Russia, Brazil, Japan and France, to stop pricing their oil exports in US dollars. Instead, in a move that Fisk warns threatens “a future economic war between the US and China over Middle East oil”, he said the plotters would switch to pricing oil in a basket of currencies comprising the yuan, the yen, the euro, gold and a new unified currency for the Gulf states, possibly using gold in an intermediate phase. As his authority for the story, he cites “Gulf Arab and Chinese banking sources in Hong Kong”.
This is hardly the first time someone has reported the demise of the US dollar. Ever since British economist John Keynes came up with his “Bancor” idea for an international trade currency more than 60 years ago, people have been proposing alternatives to the US currency, especially for pricing oil.
For example, in 2002, then prime minister of Malaysia Mahathir Mohamad called on Muslim countries to adopt a single gold-backed currency, to be called the dinar, saying it should be used to denominate their oil exports. Kazakh dictator Nursultan Nazarbayev has demanded the creation of a world currency to be called the “acmetal”, while earlier this year, People’s Bank of China governor Zhou Xiaochuan published a paper suggesting internationally traded commodities be priced in special drawing rights - a unit of account used by the International Monetary Fund. And there is considerable support among other politicians - if not among business people - for the idea of moving away from using the dollar.
Last year, Russian Prime Minister Vladimir Putin said China and Russia should ditch the dollar and instead settle trade between the two countries either in roubles or yuan. Then earlier this year, Brazilian President Luiz Inacio Lula da Silva suggested that Brazil and China should stop using the dollar to settle their bilateral trade. Hong Kong government officials, meanwhile, speak gushingly of settling the city’s trade with the mainland in yuan.
But so far, none of these schemes have come to much. Commodities, including oil, continue to be denominated in dollars, and the world still continues to price and settle most of its international trade in the US currency.
Despite the “secret meetings” mentioned in Fisk’s report, that isn’t going to change any time soon. The probability is negligible that China, Japan and Russia could get together with the Gulf Arabs and succeed in agreeing a common basket currency acceptable to all.
And if they did, the five-way basket Fisk describes would be a wildly inconvenient instrument for denominating oil trades. Not only is it far too complex for practical use, but the benchmarks used for pricing oil - the futures contracts traded in London and New York - would continue to be denominated in dollars. As a result, it would be highly unlikely that the new basket would ever gain the critical mass necessary for wider commercial acceptance.
Nor would the idea make much sense in political or economic terms. The Gulf states are currently pegged to the dollar, the currency of their main international ally. With inflationary pressure abating, they have little incentive to adopt an alternative either for domestic use or for pricing their exports.
The idea has drawbacks from Beijing’s point of view, too. China’s export earnings are US dollar-denominated, as are most of its foreign reserves, so it makes sense for China to pay for its imports in dollars, too. Switching to a basket oil price would introduce an unnecessary and potentially risky currency mismatch.
Even if Fisk’s cabal could overcome all these obstacles to price its trade in oil and perhaps other commodities in its new currency, the basket would still face an uphill struggle to displace the dollar from its position as the world’s dominant currency.
That’s because world trade in commodities is dwarfed by global financial flows, and financial flows are overwhelmingly denominated in dollars, because US financial markets are still deeper and more liquid than anyone else’s. As a result, world financial markets will continue to work in dollars for the foreseeable future.
That’s not to say the US currency won’t be deposed one day. But it is a safe bet it won’t be replaced any time soon by anything resembling Fisk’s basket. He might be an acknowledged expert on the conflicts of the Middle East, but it looks like Fisk’s lost the plot on this one.
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