There has been an interesting discussion on the role the weakening dollar had played in contributing to higher commodity prices. The President of Iran, Mahmoud Ahmedinejad, recently joined this debate, pointing out that the US pays for its oil in depreciating currency.
Speaking on the sidelines of the Conference of the OPEC International Fund for Development, the President of Iran said it is time for oil companies to dump the dollar in favour of a basket of currencies.
In his picturesque way he points out that oil is being paid for today in fake currency, referring to the US dollar, which is depreciating. The immediate effect of the Iranian President’s observation on shifting to a basket of currencies was an inevitable fall in the dollar with its impact on the markets, and further rise in the price of crude oil.
There is some substance in what the Iranian President has said. The negative impact of the depreciated dollar on petroleum exporting companies’ earnings is obvious. Payment in depreciated currencies leads to a rise in nominal prices.
No drop in supply
The Iranian President has also observed that the hike in oil prices, which had gone up to $ 140 billion per barrel recently, was not in anyway due to a drop in supply, but on account of different conditions.
He has also referred to the usual suspect, viz. speculation by commodity traders on the various exchanges, which, he pointed out, was also leading to higher and higher oil prices.
What is interesting is the President’s argument that a cheap dollar is contributing to costly oil and hence other costlier commodities. There is a correlation between falling dollar and rising crude prices in the short run. It is not, however, always true that correlation implies causation.
An interesting article in the Financial Times of June 15, 2008, points out that oil and dollar traders feed each other similar messages. The article has a chart that shows close correlation between the falling dollar and higher oil prices.
When a country or a group of countries devalue their common currencies, their imports become costlier. This is applicable to the dollar as much as to any other individual currency. There is also the fact that the easier monetary conditions in the US have enabled their financiers to apply needed funds to speculation in commodities at relatively low rates of interest.
Combination of factors
This has further fed an inflationary spiral. It follows that one of the roots of the oil price problem may well lie in the decline of the dollar and the easier monetary conditions the US’s Federal Reserve encouraged in order to keep the US economy growing.
The unintended consequence of this situation is likely to be a serious worsening of the inflationary spiral. No change in policy can, however, be expected till the Presidential elections in the US declare the winner.
The answer to this inflation problem may have to come from a combination of a strong dollar and an increase in oil supply, besides tightening of US monetary policy. Granted, the US economy is almost in a state of recession.
This itself may lead to diminution in demand for petro-products. The same is true of various other countries, including, in particular, those in South-East Asia and in South Asia, such as India, which have raised the prices of petro-products.
The situation is, however, not clear as to what extent a strong dollar per se will enable the OPEC partners to shift to lower price. The resolution of this dilemma depends on the greed factor of OPEC countries and, in particular, Russia.
If the Americans are willing to pay a strong dollar, OPEC will charge them the same or higher price, notwithstanding the Iranian President’s argument to the contrary, implying that the weak dollar means a higher crude price.
NOT practising what it preaches
Overall, the Iranian President’s statement adds strength to the point of view that the decline of the dollar constitutes a threat to international financial stability. What America is doing by devaluing its dollar is unfair competition through non-tariff means.
This is precisely the ‘crime’ they were urging China and other Asiatic countries to avoid. It is rather ironic that the US, which preaches fair trade practices, resorts to cheapening its currency, which helps increase the competitiveness of its industry. In the process, it is feeding the OPEC’s appetite for a higher price, albeit in depreciated nominal dollars.
The decline of the dollar leads me to another topic, which I had touched on in my previous columns, that India has nearly $ 300 billion in reserves, much of which is denominated in US dollars.
The decline of the US dollar means that for the last two years, the value of our reserves against the benchmark currency, Euro, has declined by nearly 50 per cent. This is a horrendous loss the country can ill afford and could have been avoided by diversifying its investment of reserves into a basket of various currencies. The RBI is still to come out with an answer to this problem.
The Iranian President has rightly pointed out that the declining American currency is a problem and not a solution for the world’s economic situation.
Combined with commodity speculation, it feeds into inflation and raises the prices of crude and other commodities, which are dependent on the prices of oil. It is time the IMF and the top financial policy-makers of the world concentrate on fixing the problem of the greenback.
It is true that the Chairman of the American Federal Reserve has recently been talking about the dollar. But the market does not seem to believe his protestations. The fact is the dollar remains weak and so the prices of oil and other commodities remain high.
I had referred in these columns to a famous statement by US Treasury Secretary John Connolly to his European counterparts and other such nations that “the dollar is our currency but it is your problem”.
This was with reference to the serious crisis that had arisen in the 1970s and 1980s in regard to the value of the dollar. I am reminded of this with reference to the statement by the Iranian President while reflecting on the role of a weak dollar in creating a vicious spiral of crude oil price rises and commodities’ inflation.
Competitive devaluation
There is a related discussion in the media on the relationship between the declining dollar and the policies of the US with regard to free trade. If the higher competitiveness of the US had been attempted to be accomplished by increase in import tariffs, instead of through exchange rate manipulation, the other countries of the world would have taken the US for adjudication in the WTO.
The competitive devaluation of the US is one of the flaws the WTO’s Charter aims to correct. Various sanctions the US threatens against China for the same sin of central bank’s intervention in the market and devaluation of renminbi can also be applied to the US.
Add to this, the collateral damage that a weak US dollar has inflicted on the rest of the world by contributing to speculation and higher oil prices and indirectly the food prices.
Inflation is the enemy of the world, but the driving force of this inflation lies at least partly in the weakness of the dollar, which the US has to correct before lecturing the world.
“Physician, heal thyself in order to heal the world” seems to be an appropriate message, reinforced by the Iranian leader’s statement
Speaking on the sidelines of the Conference of the OPEC International Fund for Development, the President of Iran said it is time for oil companies to dump the dollar in favour of a basket of currencies.
In his picturesque way he points out that oil is being paid for today in fake currency, referring to the US dollar, which is depreciating. The immediate effect of the Iranian President’s observation on shifting to a basket of currencies was an inevitable fall in the dollar with its impact on the markets, and further rise in the price of crude oil.
There is some substance in what the Iranian President has said. The negative impact of the depreciated dollar on petroleum exporting companies’ earnings is obvious. Payment in depreciated currencies leads to a rise in nominal prices.
No drop in supply
The Iranian President has also observed that the hike in oil prices, which had gone up to $ 140 billion per barrel recently, was not in anyway due to a drop in supply, but on account of different conditions.
He has also referred to the usual suspect, viz. speculation by commodity traders on the various exchanges, which, he pointed out, was also leading to higher and higher oil prices.
What is interesting is the President’s argument that a cheap dollar is contributing to costly oil and hence other costlier commodities. There is a correlation between falling dollar and rising crude prices in the short run. It is not, however, always true that correlation implies causation.
An interesting article in the Financial Times of June 15, 2008, points out that oil and dollar traders feed each other similar messages. The article has a chart that shows close correlation between the falling dollar and higher oil prices.
When a country or a group of countries devalue their common currencies, their imports become costlier. This is applicable to the dollar as much as to any other individual currency. There is also the fact that the easier monetary conditions in the US have enabled their financiers to apply needed funds to speculation in commodities at relatively low rates of interest.
Combination of factors
This has further fed an inflationary spiral. It follows that one of the roots of the oil price problem may well lie in the decline of the dollar and the easier monetary conditions the US’s Federal Reserve encouraged in order to keep the US economy growing.
The unintended consequence of this situation is likely to be a serious worsening of the inflationary spiral. No change in policy can, however, be expected till the Presidential elections in the US declare the winner.
The answer to this inflation problem may have to come from a combination of a strong dollar and an increase in oil supply, besides tightening of US monetary policy. Granted, the US economy is almost in a state of recession.
This itself may lead to diminution in demand for petro-products. The same is true of various other countries, including, in particular, those in South-East Asia and in South Asia, such as India, which have raised the prices of petro-products.
The situation is, however, not clear as to what extent a strong dollar per se will enable the OPEC partners to shift to lower price. The resolution of this dilemma depends on the greed factor of OPEC countries and, in particular, Russia.
If the Americans are willing to pay a strong dollar, OPEC will charge them the same or higher price, notwithstanding the Iranian President’s argument to the contrary, implying that the weak dollar means a higher crude price.
NOT practising what it preaches
Overall, the Iranian President’s statement adds strength to the point of view that the decline of the dollar constitutes a threat to international financial stability. What America is doing by devaluing its dollar is unfair competition through non-tariff means.
This is precisely the ‘crime’ they were urging China and other Asiatic countries to avoid. It is rather ironic that the US, which preaches fair trade practices, resorts to cheapening its currency, which helps increase the competitiveness of its industry. In the process, it is feeding the OPEC’s appetite for a higher price, albeit in depreciated nominal dollars.
The decline of the dollar leads me to another topic, which I had touched on in my previous columns, that India has nearly $ 300 billion in reserves, much of which is denominated in US dollars.
The decline of the US dollar means that for the last two years, the value of our reserves against the benchmark currency, Euro, has declined by nearly 50 per cent. This is a horrendous loss the country can ill afford and could have been avoided by diversifying its investment of reserves into a basket of various currencies. The RBI is still to come out with an answer to this problem.
The Iranian President has rightly pointed out that the declining American currency is a problem and not a solution for the world’s economic situation.
Combined with commodity speculation, it feeds into inflation and raises the prices of crude and other commodities, which are dependent on the prices of oil. It is time the IMF and the top financial policy-makers of the world concentrate on fixing the problem of the greenback.
It is true that the Chairman of the American Federal Reserve has recently been talking about the dollar. But the market does not seem to believe his protestations. The fact is the dollar remains weak and so the prices of oil and other commodities remain high.
I had referred in these columns to a famous statement by US Treasury Secretary John Connolly to his European counterparts and other such nations that “the dollar is our currency but it is your problem”.
This was with reference to the serious crisis that had arisen in the 1970s and 1980s in regard to the value of the dollar. I am reminded of this with reference to the statement by the Iranian President while reflecting on the role of a weak dollar in creating a vicious spiral of crude oil price rises and commodities’ inflation.
Competitive devaluation
There is a related discussion in the media on the relationship between the declining dollar and the policies of the US with regard to free trade. If the higher competitiveness of the US had been attempted to be accomplished by increase in import tariffs, instead of through exchange rate manipulation, the other countries of the world would have taken the US for adjudication in the WTO.
The competitive devaluation of the US is one of the flaws the WTO’s Charter aims to correct. Various sanctions the US threatens against China for the same sin of central bank’s intervention in the market and devaluation of renminbi can also be applied to the US.
Add to this, the collateral damage that a weak US dollar has inflicted on the rest of the world by contributing to speculation and higher oil prices and indirectly the food prices.
Inflation is the enemy of the world, but the driving force of this inflation lies at least partly in the weakness of the dollar, which the US has to correct before lecturing the world.
“Physician, heal thyself in order to heal the world” seems to be an appropriate message, reinforced by the Iranian leader’s statement
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