Commodity prices remain the last bastion of the dollar

Matthew Lynn
Analyst, "Bloomberg News"

Oil, metals and even the planes could be evaluated once in the euro rather than in dollars.

Is it really?
As the dollar remains weak in the currency markets, with a few signs to support the rebuilding, there is speculation that, at some point commodity prices abandon the American currency. If this happens, it will mean a wider restructuring of the global financial system and indicate that the dominance of the dollar as world reserve currency is over. While it is too early to draw conclusions about the end of the dollar, still the problem is real and growing. The world may well
faced with a period during which the dollar and the Euro will compete for the status of reserve currency - is hardly a promising situation for global stability.

U.S. avoided for obvious reasons. The trade deficit rose last year to a record $ 609 billion, and the Bush administration expects the budget deficit reached a record $ 427 billion for the year ending in September. The index of the dollar against a basket of six major currencies fell by 18% since late 2001. There are three key response to the changing status of the dollar in the global financial system. Central banks may change their reserves against the dollar. Asian currencies may terminate its connection to the U.S. currency. And finally, we can see the cessation of the major commodities in U.S. dollars. Central banks have slowly raised the proportion of dollars in their reserves and reducing their dependence on dollars. This trend will likely continue. All the same it will be a slow process and, last but not least, for the simple reason that neither the central bank does not want to shoot in the U.S. is already a fragile market.

Asian benchmarks
Asian countries could stop its dollar guidance, but could not. Policy in their decisions to play the same role as the economy. Commodity prices remain. If the unique status of the dollar actually ends, then we will see again. "It is critical for the dominant role of the dollar as a reserve currency, that the evaluation of oil should last dollar," said an economist from the "Monument Securities Ltd." in London, Stephen Lewis, in his recent analysis of foreign exchange. Is there a real possibility that oil or any other major change in its product evaluation at the Euro? Last month, the head of Saudi Arabian Monetary Agency Hamad Al-Sayari has caused a slight commotion in the markets of his comments, saying that he believes that the role of the euro in central bank reserves in the future will increase. "A more appropriate," he said, that did not have much importance, will the oil measured in dollars or euros.

Accounting issue
It does not matter to him, but it is for others. Take a look at this issue from the perspective of oil producers, or producers of any other basic goods. On the one hand, the currency in which the estimated price of your product, is largely a matter of accounting. Saudi Arabia can assess its oil in dollars, or South Africa to gold, or the French of its new aircraft "Airbus SAS", not making a big difference to their actual income. As soon as they arrive U.S., they can sell them for any other currency that they want. If you are unsure about the future price of your product is likely to bring, you can buy and sell currency futures markets.

Only for the reason that your product is evaluated in a currency, you will not be forced to keep the currency. In the medium term, it really matters. Manufacturers of any product looking for a high and stable prices. If your product is valued at continuously weakening currency, you must continue to raise prices. This is not entirely satisfied with them. At some point, the temptation to switch to a stronger currency will become irresistible.

Who upset the established order
Further, commodity prices affect the currency markets. The fact that the goods are valued in dollars, is one of the key sources of strength of the currency. Anyone facing a lot of money buying goods like oil, metals or aircraft, must buy dollars for their purchases. This is the main source of demand for the currency. Who will be the first to breach the existing tradition? Right now, this is nothing more than speculation. Russian oil should be one of the candidates, since most of it, one way or another, sold in Europe. The aircraft "Airbus" should be the other candidate, because most costs are in euros, and they now have a dominant position in the industry.

"Maybe once this happens," said the representative of "Airbus" Barbara Krats electronically answering the questions. "The point is that it is the clients decide in which currency they want to see the price, and now they are asking for prices in dollars."

Reducing or flight
Just right. You should keep a very strong market position to introduce a new currency for their products. A lot depends on the future movement of the dollar. It has weakened to approximately three years. So far, the producers responded to higher prices. A further weakening of the dollar, two, and they may well decide to take more drastic action. It should be only one manufacturer to violate the established order and it will find broad support. In this sense, reducing the dollar could well turn into a rout of it. Commodity prices are now the weakest line of defense for the dollar.

Forex Magazine
based on www.bloomberg.com