17 April 2015

The Decline of the Petrodollar

One of the biggest benefits the US Dollar enjoys is that the global oil market is priced in US Dollars. As a result any country that imports oil has to pay oil export nations in US Dollars. In the past oil exporting nations have have accumulated billions of Dollars that they have invested back in US stocks and bonds.

However, things are beginning to change. According to a an article in ZeroHedge, for the first time in almost 20 years, oil exporting countries are set to pull their petrodollars out the the world market this year. (Source: ZeroHedge 2015 April 15th) So in other words, because of low oil prices these countries are withdrawing dollars instead of using the dollars to buy assets in Europe and the US.

In the same article, in-house economists at Bank of America summed up their views as follows. “...the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.” 

The currency markets are going through subtle but dramatic changes. Some countries are by-passing the Dollar in foreign trade through developing swap agreements to trade goods in their own currencies. This trend is likely to continue and will have a big impact on global financial markets in the years to come. 

Could the Yuan replace the Dollar as a Reserve Currency?

The other big story recently has been the new China led Asian Infrastructure and Investment Bank (AIIB). According to another ZeroHedge article, The South China Morning Post reported that Beijing will push for the Yuan to be included in a basket of currencies used to denominate and settle loans from the Chinese-led Asian Infrastructure Investment Bank. This is according to Think Tank sources. (Source: ZeroHedge 2105 April 15th)

It looks as though Asia could be moving toward a currency system where the Chinese Yuan is the preferred currency for all of Asia. The Dollar is under pressure from two fronts; will it continue to be the currency of choice for oil trade? and will it be used in Asia for loans an investments?

Big changes are coming to the currency markets. However, it is not yet clear how it will all play out and how these changes will effect the major currencies. Having large sums of savings in paper currencies could be a risk. Physical Gold and Silver will likely perform well in an environment where there is uncertainly in the currency markets.

Author: celticgold.eu

Older 2015: The year of Financial Market Extremes Newer The Bretton Woods Monetary era may be Coming to an End