Oil-producing nations face dollar’s drop

John Dimsdale Nov 2, 2007
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Oil-producing nations face dollar’s drop

John Dimsdale Nov 2, 2007
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TESS VIGELAND: This week thousands of construction workers in the Persian Gulf emirate of Dubai went on strike. They were protesting hard working conditions and low pay. But they also complained about the falling value of their wages. That’s because Dubai’s currency, like its oil, is linked to the dollar. So when these workers send their savings back home to India or Malaysia, their families say it doesn’t go very far. As John Dimsdale reports from Washington, the falling dollar is putting a lot of pressure on Gulf countries to de-link their currencies from the greenback.


JOHN DIMSDALE: When the Fed cut interest rates again yesterday, so did Saudi Arabia, Dubai and other oil-rich kingdoms. Even though lower interest rates are likely to worsen the raging inflation in their countries, they’ve decided to keep their link to the dollar. For now.

If oil-producing countries decide they’ve had enough, Nobel-prize winning economist Joseph Stiglitz worries the dollar’s value could spiral down.

JOSEPH STIGLITZ: It has a certain symbolic effect of reminding everyone that the dollar is no longer the global currency, is no longer a good store of value. As people get reminded it’s not a good store of value, people won’t want to hold as much dollars. That means they’ll try to sell their dollars and that means the value of the dollar will go down.

If oil were priced in another, stronger currency — euros for example — oil exporters could be earning even more profits. But Princeton’s Alan Blinder, a former vice chairman of the Federal Reserve Board, isn’t so sure they’ll abandon the dollar.

ALAN BLINDER: They’re receiving dollars in great gobs. So they have to decide what to do with these dollars. If they started selling them aggressively, that would tend to push the dollar down. They would be shooting themselves in the foot, because they would impose losses on themselves.

If oil producers drop the dollar, Americans will find their weaker currency buys even less overseas. The trade deficit would probably improve, as foreigners bought cheap U.S. products. But imports, especially oil, would cost more. And economists agree the biggest threat would be more inflation.

In Washington, I’m John Dimsdale for Marketplace.

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