Thursday, September 20, 2007

Saudi Move From Dollar Could Have Chain Reaction

Since World War II ended, the U.S. dollar has effectively been the world's reserve currency, which has conferred countless benefits most Americans are unaware of.Saudi Arabia now may have to defend its immense investments in dollar-based bonds and financial instruments by diversifying into other currencies because of the interest rate decrease in the USA. The Daily Mail link above notes:
"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

The Saudi Finance Ministry was a friend while he was on the board of the IMF in DC & he will argue strongly, I'm sure, for defending the dollar. I still get Holiday notes from him each Christmas. But he is among several players making the decision.

The Oil Minister might have a say. All OPEC crude oil purchases are denominated in dollars and thus this gigantic slice of the world economy is a lever that gives the dollar strength vis-a-vis the Euro & Yen. The Minister Naimi may get tremendous pressure from other OPEC members, including Kuwait which has already decoupled from the dollar, to join them and make a complete decoupling. The head of SAMA is a monetarist, and may also urge for a dollar decouple.

I am no economist, but my years in the oil industry gave me a new appreciation of the dollar. And the effects of US foreign trade if the dollar craters would actually be beneficial, though it would more than offset by diminished spending due to lower housing prices.

It turns out that the housing boom has triggered a housing bust. Driving on I-95 to the University of Miami the other day, I passed dozens of buildings on Brickell & other spots in downtown Miami in mid-construction. Ironically, the cranes and gantrys reminded me of the Saudi building boom decades before.

If the Saudis back out of the dollar, a lot of those buildings will remain vertical skeletons for a long time.

And the sustained post-WWII economic boom, punctuated by occasional hiccups, might end if the US dollar loses its status as the world's de facto reserve currency.

1 comment :

David Wozney said...

Re: “All OPEC crude oil purchases are denominated in dollars ...

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as having the value of 1/42.2222 fine troy ounces of gold.