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Oil and the dollar

Scott Jagow Dec 11, 2006


SCOTT JAGOW: If you’re wondering why the dollar has been doing so poorly, we think we’ve found one reason. A report today from the Bank of International Settlements has this little nugget: Oil-producing countries have switched a lot of their holdings away from the dollar and into other currencies. Carola Hoyas is Chief Energy Correspondent with the Financial Times. Carola, why is this significant?

CAROLA HOYAS: It’s a bit like the dog chasing its tail. On the one hand it explains why we’ve had this rather steep fall in the dollar over the last few months, and at the second it also looking forward makes it more likely that the dollar will come under increased pressure. These countries hold a huge current account surplus. We worry a lot about China’s surplus but these countries hold $500 billion in current account surplus and that’s almost two and a half times that of China just to give you a rough idea how powerful these countries are.

JAGOW: Well why are the oil-producing countries getting out of the dollar in the first place?

HOYAS: Well the oil-producing countries have seen the dollar fall and there are lots of reasons why people speculate the dollar is falling, including U.S. economic weakness, but oil is traded in dollars and so they’re very rich in dollars. But a lot of their imports are in euros so as the dollar has fallen, they’ve seen their purchasing power fall as well. And to try and stem that a little bit, they’ve moved into euros, and yen I would assume. It’s a very opaque world and some people would have large conspiracy theories about this being somehow politically motivated but I think there’s probably more of an economic reason than a political reason to do so at this point.

JAGOW: OK Carola, thanks a lot.

HOYAS: Sure my pleasure.

JAGOW: Carola Hoyas of the Financial Times.

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