Some stories will run and run and this morning’s report from the Independent newspaper regarding a possible replacement of the USD as the exchange currency for oil is another chapter in the plot against the USD as the world’s most dominant reserve currency. The story concerns ‘secret meetings’ between finance ministers and central bank governors in Russia, China, Japan and Brazil to trash out how the USD could be replaced in oil trades by a basket of currencies that would include the JPY, CNY, EUR, gold and a new unified currency from the Gulf region. The denials from Saudi were swift, with the central bank governor citing the report as being absolutely incorrect. There is no smoke without fire, however. While the Saudis may not have been involved in talks to reduce their dependence on the USD, Chinese interest this year in bilateral trade deals and in taking stakes in energy and commodities producers around the globe clearly illustrates that China is already taking steps to diversify from the USD. The crux of this story is, of course, the USD’s failing credentials as the world’s reserve currency. The USD may be falling from grace, but it remains the case that since there are no alternatives its fall from pole position will be slow. EUR/USD rallied through the 1.4700 level overnight but stalled ahead of 1.4750. Comments from ECB President Trichet last night indicating his concern on EUR strength are a reminder of political sensitivity connected with EUR/USD at present and this should offer the USD support. Full text »
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