The Future of the Petrodollar

di Finanza Operativa 26 Ottobre 2018 | 14:00

A cura di Walter Snyder, WWS Swiss Financial Consulting SA
The ancient Romans had a different view of the future than modern man who thinks that he can see into the future. The Romans reckoned that one could see what had happened, namely the past, so one could look at the past that was in front of one. The future could not be seen and therefore was behind a person and gradually became visible as it moved into one`s view.
What is known is that the US dollar is the dominant global currency both in terms of its being a central bank reserve currency and being the most used currency in the Forex markets. The US dollar as a central bank reserve currency represents about 62% of central bank holdings. In Forex markets the US dollar is used in 85% of all transactions. That means that the US dollar is one of the two currencies in the sale or purchase of currencies in Forex markets. It should also be noted that many international loans taken out by countries and corporations are denominated in US dollars. Thus the US dollar is the dominant currency in global finance.
The beginning of the use of the US dollar as the dominant currency in international finance can be dated to July 1944 thanks to the Bretton Woods agreement when a gold-based US dollar became the standard currency for international transactions. There was a meeting in 1945 between President Roosevelt and King Ibn Saud to discuss various issues. The Bretton Woods system held until 1971 when President Nixon took the bold step of ending the redemption of US dollars for gold. The petrodollar agreement was developed thanks to Henry Kissinger in 1973-1974, and a Commission was established in 1979. The US offered Saudi Arabia military protection in return for the Saudis insisting on US dollars as payment for oil. Other oil-producing countries soon followed suit, and since that time up until 2018 the US dollar has continued to hold its dominant position. This is a very brief history of the petrodollar and is really nothing new.
China finally started the Shanghai oil futures market in spring 2018 while Iran and Venezuela had tried earlier to market oil in non-dollar currencies. The Sino-Russian gas pipeline deal avoided US dollars altogether. The sequel to this Newsletter will deal with what could happen to the petrodollar in the near future. The question is of particular importance to investors at the present time, given the geopolitical tensions not only in the Middle East but also globally.

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