US$ weakness, Reserve/Benchmark Status and Oil prices
Yesterday, the Aussie $ was exceptionally strong, so I guess that was due to the news that went public today about Korea switching out of some of its US$ and into C$ and A$, although the C$ was not strong yesterday. We already know that Russia has reduced US$ holdings and it is a possibility that this is going on quietly in other Central Banks, including in the Middle East, who are trading more with Euroland these days, according to reports. Of course, the lower the US$ goes, the less buying power oil exporters get by selling in US$, but recent statements still suggest OPEC will not reduce production unless one of two things happen:
1. the OPEC basket price gets to $35 (which is at $40 or a bit above on WTI)
2. the worldwide excess supply gets above 51 days
Meanwhile, a significant currency move can change things, with US$ strength hurting the Euro-cost of raw materials, while weakness will hurt the US-cost, the balance of payments, etc. Those who have been reading this and the related threads know that some opinion suggests that the trend to decrease US$ holdings in Central Banks is likely (IMO) to be an increasing and escalating phenomenon unless some concrete measures are taken to solving the underlying problems. The ultimate (possible) end point (IMO) of significant loss of reserve and/or benchmark status will be very harmful for the US and quite disruptive for the World economy...not something to be wished for, unless you want more chaos.
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Published on Tuesday, February 22, 2005 by Reuters
Oil exporters' shift to euros behind dollar's fall: Soros
By Mona Migalla
JEDDAH, Saudi Arabia (Reuters) - Moves by Middle East oil exporters and Russia to switch some revenue from dollars to euros lie behind the U.S. currency's weakness, and a further rise in crude prices could prompt more declines, the billionaire investor George Soros said on Monday.
Soros told delegates to the Jeddah Economic Forum that the dollar's fall should help to lower the U.S current account and trade deficits, but warned that a fall beyond an undisclosed "tipping point" would severely disrupt markets.
The U.S. current account deficit is more than five percent of gross domestic product despite the currency's three-year slide. The dollar, however, has staged a comeback recently, gaining about 3.6 percent against the euro and three percent versus the yen so far this year.
"The oil exporting countries' central banks ... have been switching out of dollars mainly into euros and Russia also plays an important role in this. That is, I think, at the bottom of the current weakness of the dollar," Soros said.
Soros, dubbed "The Man who broke the Bank of England" for his role as a hedge fund manager in betting the pound would drop in 1992, said he was not predicting further falls in the value of the dollar. But he linked its fate to the price of oil.
"The higher the price of oil the more the dollars there are to be switched to euro (so) the strength of oil will reinforce the weakness of the dollar," he said. "That is only one factor, but I think there is such a relationship."
U.S. crude hit a record $55.67 a barrel late last year and prices remain close to $50 a barrel.
In later comments to Reuters, Soros said the U.S. current account deficit could be financed at the current level of the dollar. "There are willing holders of the dollar. There are the Asian countries that are happy to accumulate dollar balances in order to have an export surplus and a market for their dollars," he said.
Soros would not make detailed comments on why long-term borrowing costs have fallen in the face of short-term rate increases, a development U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday he found difficult to explain.
"A flattening of the yield curve is usually an indication of a slowing economy, but here I don't know," Soros said.
The Hungarian-born financier, a critic of U.S. involvement in Iraq, said he was considering backing an Arab foundation to promote the ideals of civil and open societies in the region.
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posted by agrossfarm @ 8:07 AM
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