Catching up on my reading over the weekend I spotted an interesting article from Reuters. It said that resource-rich countries were expected to move away from the dollar to protect their earnings as the dollar's slide accelerated. This is unsurprising.

The article was quoting research from Emergent Asset Management, a UK-based asset management group.

The move away from the dollar as it continues to slide appears to be a logical step for many countries, so resource wars are likely to be played out in the currency markets as well as in the theatre of war.

Indeed, Iraq started to price its oil exports in euros in 2000 and it was not long after this the country was invaded by the US and its poodles. Iran is planning to take this one step further, although it has got off to a stuttering start

The country wants to open a commodity exchange, which has been called the International Oil Bourse. It would be a petrobourse for petroleum, petrochemicals and gas in various non-dollar currencies, primarily the euro. This would establish a euro-based pricing mechanism for oil trading. As of today, this bourse has not been established, although there have been a number of false-start dates announced.

Oil purchasers do not appear to be too concerned about non-dollar denominated oil sales. Unsurprisingly, Venezuela has voiced its support for Iran’s oil bourse, but so have oil-consuming giants India and China.

Bye-bye dollar

Data released earlier this month showed that Iran receives non-dollar currencies for 85% of its oil exports. Of this, 65% is in euro and 20% in yen. You don’t have to see a conspiracy in every corner like Mohammed al-Fayed to say that this is likely to be a factor in the US neo-con push to wage war on Iran. The treasury wants a soft dollar so it appears the US asset prices are expensive, but the dangers inherent in a total collapse of the currency are significant.

David Murrin, Emergent’s chief investment officer, said he thought that the chances of a re-denomination are high, but that it could take some time. He expects energy muscleman Russia to move away from the dollar, with obviously the rouble the currency of choice.

Russia has a lot of influence in the resource-rich ex Soviet states such as Kazakhstan. It doesn’t take a massive leap of the imagination to see a slow creeping away from the dollar in these areas.

I reckon that the Chinese and the Japanese will also be keen to adopt the new exchange – for the simple reason of diversification. China and Japan are massive holders of US government debt. The latest figures are from the end of July this year. China was the number one holder of US dollar debt at $610.9 billion, followed by Japan with $407.8 billion and then the UK with $210.1 billion. These countries have already seen these assets decline significantly over the last two years – how much more will they take?

Of course, a euro-denominated oil bourse would allow these countries to slash their dollar reserves and diversify with the euro. After all, how long will these countries sit and watch the value of their assets slide if they had an easy alternative. The bulk of Russia’s trade is with European countries, so euro-denominated oil sales make sense to them too.

Currency wars

One thing seems certain and that’s that there is plenty of action going on in the currency markets – and there’s likely to be even more as the resource wars heat up and the battle of the dollar and the euro plays out.

I saw a note from currency expert, Tom Tragett, earlier this morning (Tom’s made his living in the forex markets for the last 28 years, so he knows a thing or two). He’s bearish on the dollar, too.

“It looks like eastern block buying of EUR/USD which is driving the market. This in turn is helping the euro move higher against sterling.

“Despite the market generally being long of the European currency already, reserve allocation away from the dollar into the euro should continue to underpin it in the medium term…”

The bottom line from Tom: the dollar’s heading lower in the long term.

It all looks very bad for the dollar – and we Brits are going to be stuck in the middle… again… And if you believe that our “special friends” across the Atlantic give two hoots, I think you’d better think again.

The dollar is sinking lower; let’s hope that the US does not convince us to keep hold of their worthless treasuries. It could cost us dearly in the long term, particularly after Gordon Brown sold off our gold reserves when the price was cheap, cheap, cheap... P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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