The Future Of The Petrodollar

di Finanza Operativa 29 Ottobre 2018 | 18:30

A cura di Walter Snyder, Swiss Financial Consulting

The Chinese will be responsible for a downward turn as the PBoC, People’s Bank of China, will pursue the goal of making the Chinese yuan the most important global reserve currency. The institution of the Shanghai crude oil futures market is one aspect of this strategy intended to have the petroyuan compete with the petrodollar. Analysts have begun to mention the petroyuan as a future factor to be reckoned with. There will also be a gradual diminution of holdings of US dollar denominated securities, that is, Treasuries. This is likely to be gradual as the Chinese have over one trillion dollars in US securities and would not be overly happy if the US dollar suddenly falls in value.

The value of the petrodollar will also decrease due to several countries reacting to aggressive American foreign policy. This includes Iran, North Korea, Russia, Turkey and Venezuela. The weaponization of the US dollar in pursuing global goals has made these countries and others as well aware that they can be put under pressure by the US thanks to the predominance of the US dollar.

One of the key players in the oil market, namely, Saudi Arabia, may soon start accepting payments in currencies other than the US dollar due to worsening ties with the US. This means that investors should keep a close eye on the Saudis.

The Europeans are considering setting up an alternative payment method so as not to have to use the American-dominated SWIFT system. The Russians and Chinese have also set up alternative payment systems. The means that there will be less demand for US dollars in Forex markets. Less demand will mean a lower price for the currency

Another consideration is that there are large numbers of loans denominated in US dollars in the global economy. A decrease in the value of the dollar means that debtors will benefit. Servicing loans will cost less and the repayment of principal will be facilitated. Many would favor a US dollar fall.

The IMF has already introduced SDRs (Special Drawing Rights) as a form of global currency. The value of the US dollar relative to SDRs can be changed as the demand for petrodollars decreases. The IMF has plans for SDRs.

The conclusion to be drawn is that investors should get out of dollar assets while they can still get a good price for US dollars. Holding cash in US dollars may lead to losses. Recent market turmoil shows that alternative investments like gold, cars and diamonds can serve as a hedge.  Diversification helps a lot.

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