Macro Economic Trends and Risks
OPEC Spurning the US Dollar?

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February 11, 2008

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One of my investing paradigms is that dollar weakness has become US policy. This is one of the two reasons I'm in gold and silver as heavily as I am.

The following story from the Wall Street Journal relates to that theme:

OPEC Rattles the Dollar

The possibility that OPEC would make an active decision to price oil barrels in a currency other than the dollar has been bandied about, but never spoken of by anyone with any real power. That changed today, after OPEC Secretary-General Abdullah al-Badri was quoted in the Middle East Economic Digest, saying "maybe we can price the oil in the Euro."

Now, it is true that it has been argued (most vociferously by Mish, If I recall correctly) that it doesn't matter what currency oil is denominated in. I have never bought that argument because one of the elements of the equation is that the currency that is being used as the world's reserve currency has advantages inherent in that usage. Those advantages serve to make the good times just a bit better and the bad times not quite as bad for the country who's currency is the reserve. I haven't bought the argument, as well as it had been presented, because it didn't address (to my mind at least) the impact of losing those advantages. If the US dollar loses its status as being the main currency of oil, then that really does remove a key support for the dollar and brings closer, perhaps, a world in which the dollar is no longer considered the world's reserve currency.

Perhaps a good discussion for the macro-economic board might be: What are the advantages and disadvantages of being the world's reserve currency, and what happens to the underlying economy if that status changes? Perhaps for a while we can defer the side discussion of whether or not that is occurring or what would replace it, those are discussions well worth having but I have found that to have them all going on at the same time gets quite confusing.....maybe that's just me though.

To start it off, one of the issues would be: Is there any benefit to always borrowing in your own currency as opposed to having to borrow in another? Wouldn't there be some kind of currency risks (costs to translate into the other currency and then the risk of relative price changes) inherent in those situations where a country always had to borrow in currency other than their own? What would be the advantages of not having that currency risk because you always borrowed in terms of your own currency?

This isn't intended to be a discussion for foreign currency exchange experts only, but rather a conceptual discussion. Of course, Fx perspectives and insight are most definitely hoped for.