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Dollar Decline May Usher in New Era
By Dr. Nimrod Raphaeli
02/29/2008

This morning, as if on cue, Arab press in the six member states of the Gulf Cooperation Council printed lengthy articles and analyses on the need for two interrelated strategic economic policies: ending the Gulf countries’ currency peg to the dollar, and ending the pricing of oil in that currency. These two potential developments are the direct result of the sharp decline of the exchange rate of the dollar against the Euro and other major currencies, and the spiraling inflation in the oil-producing countries triggered by rising prices of basic commodities, also priced in dollar.

The central monetary authorities of the countries concerned are under mounting pressures from businesses, foreign workers, commercial banks and many segments of the population to abandon the dollar peg because the devaluation of the dollar is seen as a major factor in rising prices and inflation. The authorities in these countries have long resisted the pressures, partly in consideration of their special relations with the United States and partly because they have been reluctant to see their assets, denominated in dollars, take a sharp fall when converted into other currencies.

This reluctance is waning. The pressure is gaining momentum and the monetary authorities have but just two options: either revaluate their currencies but keep a dollar peg, or abandon the peg altogether and adopt a basket of currencies where the dollar could be dominant but not overwhelming.

The same applies to the pricing of oil. Oil producers are no longer satisfied simply to raise oil prices every time the dollar plunges further. While the oil producers are seen as the villains for high prices at the pump, in reality they are raising prices to compensate for the devaluation of the dollar caused by profligate borrowing by the United States. The dollar, once the symbol of American political power and of American economic vitality and health, is increasingly becoming the currency of second or even third choice.

In his testimony before US Congress this week, Ben Bernanke, the Chairman of the Federal Reserve, hinted of another cut in interest rates to stimulate the US economy, which is seen by many to be heading for a recession. The hint of an interest rate cut triggered quick action by many speculators who proceeded to dump their dollars. Currency speculators, as is commonly known, prefer currencies whose interest rates are rising or are expected to rise in the hopes of increasing their potential return. Their action was akin to tying a stone to the dollar’s leg.

Should the pricing of oil in US dollars cease, it would not only signal an end to an era of US dominance but also mark a victory for the President of Iran, Mahmoud Ahmadinejad, who, with his soul mate, Hugo Chavez, the President of Venezuela, has been the loudest voice in OPEC for abandoning the dollar pricing in favor of the Euro.

Thus, the defeat of the dollar is a victory for the demagogues. What a shame!

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