The Shifte From Petrodollar to Petroeuro Is Here

[Polly]

BALTIMORE, MD - According to the latest quarterly review from the Bank for International Settlements (BIS), oil-producing countries have reduced their U.S. dollar exposure to the lowest level in two years. Crude exporters are reportedly shifting oil income into euros, yen, and sterling as a hedge against a continuing tumble in the USD. This shift from petrodollar to petroeuro will have a catastrophic effect on the American economy.

It's here.

And it may do more damage to the American economy than peak oil could ever dream to throw at us.

I urge you to prepare.

OPEC and major non-OPEC producers are dumping their dollar-denominated deposits while quietly increase their euro- and yen-denominated deposits.

A complete shift away from petrodollar may pull the entire American economy to a grinding halt and may even ignite mass chaos on an unimaginable scale.

Remember a few weeks ago when holiday shoppers were trampling over each other to get their hands on a PlayStation 3? Well, just imagine what it'll be like when there's one loaf of bread on the shelf for every five people.

The major crude producers are dropping the greenback to hedge themselves against a continuing slide in the U.S. currency which has now shed nearly 7% against a Federal Reserve index of seven major currencies. Specifically, the dollar has fallen 11.6% against the euro this year, about 5% in the past three weeks alone. This year's decline against the euro is the biggest since a 16.7% loss in 2003.

The U.S. Dollar Index, which averages the exchange rates between the greenback and six other major world currencies, has shed nearly 10% over the past 12 months. Notably, about half of that has taken place since mid October.

At last look, the index was sitting at 82.90. A drop below 80.50 would represent a multi-decade low.

....

A slowdown in the U.S. economy and declining GDP, in tandem with oil-driven inflation and current housing woes, will certainly erode the dollar's value even further.

Things are bad for dollar bulls now. And they only get worse . . .

Major Crude Producers Flee from USD
The BIS confirms that Russia and members of OPEC have cut their dollar holdings from 67% in the first quarter to 65% in the second. A 2% cut may seem modest. But the move indicates crucial information for the USD outlook.

While dumping the dollar, the oil giants have increased their holdings in euros from 20% to 22% across the board. This shift has certainly added to the dollar's recent weakness, which has fallen to a 20-month low against the euro and a 14-year low against sterling.

The BIS is generally cautious with its language-unlike Michael Richards. Yet in the quarterly report it noted, "While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks' liabilities to oil exporting countries."

The review showed that U.S. dollar deposits belonging to residents of Iran and held in banks in developed European countries decreased by $4 billion. Similarly, residents of Saudi Arabia reduced their U.S. dollar deposits in banks in the United Kingdom by $3 billion, while increasing those in yen by a similar amount.

Elsewhere, residents of Ecuador, Indonesia and Qatar reduced their U.S. dollar deposits in BIS reporting banks by $2.3 billion, $1.9 billion and $2.4 billion, respectively.

Overall, OPEC's dollar deposits fell by $5.3 billion, while euro- and yen-denominated deposits increased by $2.8 billion and $3.8 billion, respectively. Placements of dollars by Russians rose by $5 billion, but most of their $16 billion additional deposits were denominated in euros.

To read the BIS quarterly report yourself, click here.

Conclusion
U.S. equity investors would be wise to add significantly to international holdings as well as into hard assets. In particular, I currently like the upside of Canadian and Australian mining stocks (especially Australian uranium) and Canadian oil and gas stocks.

http://www.energyandcapital.com/editorials.php?id=321

[Polly]

In a widely expected move, Tehran said it would use the euro for all future commercial transactions overseas.

....

Analysts said Tehran had been steadily shifting its foreign-held assets out of dollars since 2003 and that Monday's announcement was unlikely to affect the value of the dollar, which has weakened significantly in recent months.

An Iranian spokesman said all its foreign exchange transactions would be conducted in euros and its national budget would also be calculated in euros as well as its own currency.

"There will be no reliance on dollars," said Gholam-Hussein Elham.

"This change is already being made in the currency reserves abroad."

The currency move will apply to oil sales although it is expected that Iran, the world's fourth largest oil producer, will still accept oil payments in dollars.

.....

http://news.bbc.co.uk/1/hi/business/6190865.stm

[Polly]

Jan. 24 (Bloomberg) -- Kuwait, the third-largest Arab oil producer, may abandon the dinar's peg against the dollar in favor of a basket of currencies to help minimize economic harm after the dollar declined.

``We might go to a basket for an interim period,'' Bader al- Humaidhi, Kuwait's finance minister, told reporters today at the World Economic Forum in Davos, Switzerland. ``The dollar fell a lot against the euro last year, but if we'd been linked to a basket we wouldn't have suffered'' as much.

Al-Humaidhi declined to comment on which currencies might be in the basket. A switch from the dollar is being studied by Kuwait's central bank, he said. The Kuwaiti dinar rose to 0.28915 against the dollar as of 4 p.m. in London, from 0.28920 yesterday, according to Bloomberg data.

Dollar reserves are being replaced with euros by oil producers including the United Arab Emirates and Venezuela. China, which has the world's largest foreign-exchange reserves, and Indonesia say they plan to increase euro reserves and Iran says it's boosting oil sales priced in euros.

The dollar has declined 5.2 percent against the euro in the past 12 months. The currency traded at $1.2955 against the euro at 12:47 p.m. in New York from $1.3026 yesterday, when it reached a two-week high of $1.3044.

Currencies Undervalued

(snip)

Kuwait in 2003 became the last of six Gulf Arab monarchies including Saudi Arabia to peg its currency to the dollar in readiness for a single currency planned for 2010.

The Kuwaiti dinar is trading at the top of a 3.5 percent permitted band set when the dollar peg was established in January 2003.

Kuwait central bank governor Sheikh Salem Abdul Aziz al- Sabah last month said he may decide to widen the range or change the peg if the U.S. currency continues to weaken and threatens domestic growth.

The Group of Seven industrial nations, including the U.S., Japan, Germany and the U.K., in April urged countries with current-account surpluses to allow their currencies to appreciate to help adjust global imbalances.

``I don't think other Gulf countries are going to adjust their pegs,'' Dorothee Gasser, a Middle East and Africa economist at ING Bank NV in London, said in a phone interview today. ``What we are likely to see is that they are going to convert some of their reserves into gold. It's bearish for the dollar.''

(snip)

Kuwait remains committed to a single currency for the Gulf states, al-Humaidhi said today. ``The 2010 target is still the same. I hope we can meet it,'' he said.

http://www.bloomberg.com/apps/news?pid=20601170&sid=apKr7Xk5pmHs&refer=home

[Polly]

This is from Morgan Stanley.   

The US Treasury’s latest report on international capital flows came as a shocker.  Net foreign inflows into longer-term US securities fell to just $15.6 billion in December 2006 -- the weakest monthly reading in nearly five years.  This stands in sharp contrast to America’s enormous external financing needs -- about $3.5 billion of foreign capital inflows each business day required to fund a current account deficit that was running at close to an $875 billion annual rate in the first three quarters of 2006.  Does an external financing shortfall of this magnitude finally spell trouble for the seemingly Teflon-like US dollar?

(snip)

Notwithstanding these flaws, the TIC data should not be ignored.  Over time, the Treasury statistics do a reasonably good job in tracking the international investment transactions embedded in the US balance of payments.  As such, TIC reports can be helpful in pinpointing the tensions arising between America’s external financing requirements and foreign willingness to provide the requisite capital.  And there can be no mistaking a worrisome build-up of tensions on several fronts: First, the United States has made no effort to reduce its chronic saving shortfall.  Reflecting persistent structural government deficits and the first back-to-back years of negative personal saving since the early 1930s, the US net national saving rate has held at a record low of 1% of national income over the past three years.  Lacking in domestic saving, America has placed heavy demands on the rest of the world -- absorbing about 70% of global surplus saving over the past couple of years -- to fund its ongoing economic growth.

Second, the rest of the world is waking up to the notion that there are alternatives to low-yielding dollar-denominated assets.  That’s especially the case in the poor countries of the developing world, who collectively hold over $2.5 trillion in excess foreign exchange reserves -- that is, reserves above and beyond those which would be required to pay off some $550 billion of short-term external indebtedness.  A year ago, former US Treasury Secretary Larry Summers gave a speech in India that challenged reserve managers in the developing world to seek higher returns on their increasingly large asset pools in order to help meet urgent social and economic imperatives (see “Reflections on Global Account Imbalances and Emerging Markets Reserve Accumulation,” L. K. Jha Memorial Lecture, Reserve Bank of India, March 24, 2006).  The Summers message galvanized attention on this issue -- especially in Asia, where the bulk of excess reserves are held.  Talk of portfolio diversification intensified, ultimately culminating in China’s recent announcement that it would allocate around $200 billion of its more than $1 trillion in reserves toward the start-up of a Singapore-GIC-style multi-asset fund.  With most reserve managers having massive overweights in dollar-denominated assets, such diversification strategies can only complicate America’s external financing needs.

Third, Washington continues to flirt with a protectionist response to America’s outsize bilateral trade imbalance with China.  I spent some time in Washington this week discussing trade issues with congressional leaders, and I came away with the distinct impression that the die is cast for a much more aggressive approach to US-China trade policy (see my 13 February Special Economic Study, “The Politicization of the US-China Trade Relationship”).  Under Democratic leadership, there is a higher probability that ongoing Chinese trade frictions could result in more serious legislative efforts than was the case when the Republicans were in control.  Moreover, with such initiatives enjoying broad-based bi-partisan support, the only real question, in my view, is whether the margin of passage will be large enough to override a likely presidential veto.  Should such legislative “remedies” be enacted, I have little doubt that Chinese participation at upcoming Treasury auctions would be sharply reduced -- a hugely negative development for the dollar.

There are, of course, many other considerations weighing on the dollar -- ranging from a likely narrowing of cross-border interest rate spreads and relative equity returns to reserve diversification strategies of Middle East and other Asian reserve managers.  At the same time, the three largest surplus savers in the world -- China, Japan, and Germany -- are all hard at work trying to stimulate internal consumption.  To the extent those efforts bear fruit -- and, in my view, it’s only a matter of when -- they will then draw down their surplus saving and have less excess capital to send America’s way in the form of investments in dollar-denominated assets.

Despite these dollar-bearish conclusions, I stand by my view that a currency realignment should not be viewed as the principal means to rebalance an unbalanced world (see my 9 February dispatch, “The Currency Foil”).  Instead, significant adjustments are needed in the mix of global saving -- more from the US and less from China, Japan, Germany, and the Middle East.  A currency realignment is, at best, a circuitous route to such an endgame.  At the same time, I still believe that the day is coming when the dollar will be hit by global portfolio adjustments, as foreign investors demand significant financing concessions -- either in the form of a weaker dollar and/or higher longer-term real interest rates -- for their heretofore open-ended buying of dollar-based assets.

A monthly TIC report can hardly be viewed as a decisive verdict on anything.  But the December collapse in foreign demand for longer-term US securities also coincided with a sharp widening of the monthly trade deficit to $61 billion -- drawing the narrowing trend of the preceding three months into question.  With America’s external financing needs remaining huge by any standard, it becomes tougher and tougher for the US to attract the requisite capital inflows under the best of conditions.  It may well be that we will look back on the December 2006 TIC report as a warning shot of what was to come -- an increasingly difficult external financing climate for a saving-short US economy.  The clock is tic(k)ing.

http://www.morganstanley.com/views/gef/archive/2007/20070216-Fri.html#anchor4410

[The Smoking Man]

Well, glad to see good old Morgan Stanley is taking the opinion that Mercator and I have had since prior to 9/11.

The whole concept that the weakness in the dollar is 'China's fault' is patently absurd since the bulk of overseas investment IS from the USA.

So ... when I buy a Motorola phone, for example, sure you see money going into China where the thing was made but ... where do the PROFITS go? It's a US corporation.

By rights, it should be flowing to the USA, right ... wrong ... the tax laws in the USA are as such that it is more beneficial to have these funds held in offshore accounts.

Look at Halliburton, for god's sake. Vice president Cheney was responsible for setting up Companies in the Caymen Islands that allowed them to work with Saddam, hide their wealth and resulted in a couple of million in tax breaks resulting in them not only NOT paying taxes but GETTING A REFUND to the tune of a couple of hundred million dollars. They went from PAYING over three hundred million in taxes to tax refunds in one year.

Who did this all benefit??? Ask Bush's power base: his homeys; the elite 2 - 5% of the population of the USA who are CEO's and major shareholders.

Does anyone wtill believe that Bill Gates is the Richest man on earth ... Or the guy who owns IKEA???

I'll bet they are the only two stupid enough to declare that much of their wealth to the government.

Heck, to the UK, I appeared to be making about £20K per year. In reality however, I was making £375/day with the bulk of the money in off shore accounts.

So, yeah ... I know how it works.

All the incentives are there for the biggest money makers to hold funds off-shore where they can't be seen by the local tax offices.

In fact, this is how places like Switzerland, the Cayman Islands, Jersey, etc. survive as nations. They have dick when it comes to GDP unless you consider coconuts, chocolate and watches to be real big money earners. Yet they are sitting on vast financial reserves.

This is all money that should, by rights, be sitting in the USA and the UK propping up their currencies.

You see ... manufacturing in China is beneficial for many reasons more than just cheap labour.

Nobody in China gives a rats ass where the profits go since it is foreign investment. Nobody in the USA sees where the profits go since they are generated outside the borders of the USA.

It's a financial black hole.

[Polly]

With the gutting of the US manufacturing base and the growing optimization of the chains of production in China, I think it is fair to say the trend of huge trading surplus and foreign capital influx will be here to stay. 

And the seachange in China's policy of dealing with the green scrips earned is imminent.  Gone will be the days when she buys T Bills reflexively and finances the US twin deficits and its wars. 

The government reckons they need 700 billion of foreign reserve for all intents and purposes and will be injecting the current surplus of 200 billion into an investment company for investment outside China.  To mop up excess domestic liquidity on the other hand, the government will be issuing RMB bonds, thereby discouaging flipping and speculation in the property and stocks market.

An economic system without boom or bust, an economic system whereby a peasant worker making USD 120 can have all his basic needs met, it seems that this is what the socialist society with Chinese characteristics is partially about.

This is all very ominous for the US dollar.

http://www.financialsense.com/editorials/phillips/2007/0216.html

[Polly]

BEIJING (Reuters) - China's state-run Zhuhai Zhenrong Corp, the biggest buyer of Iranian crude worldwide, began paying for its oil in euros late last year as Tehran moves to diversify its foreign reserves away from U.S. dollars.

The Chinese firm, which buys more than a tenth of exports from the world's fourth-largest crude producer, has changed the payment currency for the bulk of its roughly 240,000 barrels per day (bpd) contract, Beijing-based sources said.

Japanese refiners who buy about 500,000 bpd of Iranian crude, nearly a quarter of Iran's 2.2 million-bpd shipments, continue to pay in dollars but are willing to shift to yen if asked, industry sources and officials said separately.

Iranian officials have said for months that more than half the OPEC member's customers switched their payment currency away from the dollar as Tehran seeks to diversify its reserves, but news of the Zhenrong change is the first outside confirmation.

http://business.scotsman.com/latest.cfm?id=474362007

[Polly]

Iran's efforts to switch from U.S. dollar to other currencies in crude oil deals appear to be progressing.

An official with Iran's oil ministry says 60% of payments are now made in non-dollar currencies.

The U.S. has been trying to prevent overseas banks doing dollar deals with Iran, a move which Washington leaders think could undermine the Iranian economy.

However, Tehran has proved those efforts ineffective by introducing a currency shift in crude deals.

Iran has succeeded in ensuring that almost all European and some Asian clients have agreed to pay in currencies other than U.S. dollars, a senior oil official said on Thursday.

Tehran has informed its clients that it would welcome their decisions to swap trade from the U.S. dollar to a mixture of currencies, Hojjatollah Ghanimifard, the director of international affairs of the National Iranian Oil Company (NIOC), has told Reuters.

This is based on commercial reasons such as the weak dollar.

http://www.presstv.ir/detail.aspx?id=3538&sectionid=351020103

[The Smoking Man]

Iran's efforts to switch from U.S. dollar to other currencies in crude oil deals appear to be progressing.

Iran has succeeded in ensuring that almost all European and some Asian clients have agreed to pay in currencies other than U.S. dollars, a senior oil official said on Thursday.

Tehran has informed its clients that it would welcome their decisions to swap trade from the U.S. dollar to a mixture of currencies, Hojjatollah Ghanimifard, the director of international affairs of the National Iranian Oil Company (NIOC), has told Reuters.

This is based on commercial reasons such as the weak dollar.

Oh ... this is good ... this was supposed to be one of the reasons that they invaded Iraq... Saddam was accepting funds in none US dollars too.

[Polly]

MOSCOW, April 24 (RIA Novosti) - Russia's largest crude producer LUKoil [RTS: LKOH] could switch to preparing its financial statements in other currencies due to the dollar's volatility, a senior executive said Tuesday.

"The dollar's volatility strongly affects our financial statements," LUKoil Vice President Leonid Fedun said.

Fedun said LUKoil will discuss with its shareholders the issue of switching the company's financial statements to rubles or euros.

"Today, we actually do not trade in U.S. dollars but submit our reports calculated in U.S. currency," Fedun said.

LUKoil presented April 24 its 2006 financial statements prepared in accordance with U.S. GAAP standards.

The company's net income increased 16.2%, year-on-year, in 2006 to $7.48 billion, earnings before interest, taxes, depreciation and amortization (EBITDA) increased 18.2% to $12.3 billion and sales grew 21.4% to $67.68 billion, LUKoil said.

http://en.rian.ru/business/20070424/64275253.html

GCC dollar in 2010 to come too...

[Polly]

Kuwait drops dollar peg
By Ulf Laessing

KUWAIT, May 20 (Reuters) - Kuwait unshackled its dinar from the tumbling U.S. dollar on Sunday and switched the exchange rate mechanism to a basket of currencies, throwing plans for currency union with other Gulf Arab oil producers into disarray.

Kuwait's central bank, which battled speculators for weeks to defend the peg, said the dollar's slide against other currencies had forced it to break ranks with fellow Gulf states to contain inflation from the rising cost of some imports.

The move stunned Gulf currency markets and volumes dried up. The impact would be clearer on Monday when international markets open, said Steve Brice, chief middle east economist at Standard Chartered Bank in Dubai.

Oman and Bahrain, the two smallest Gulf economies, and Saudi Arabia, the largest Arab economy, said they planned to stand by their pegs. There was no comment from the central bank of the United Arab Emirates, whose currency is likely to take centre stage on Monday as prospects for a single currency evaporate.

Kuwait was still committed to monetary union, the central bank governor said in a statement, after changing the dinar's rate to $0.228806, an appreciation of about 0.37 percent.

"The massive decline in the dollar's exchange rate against main currencies ... has contributed to the increase in local inflation rates and this step is part of the central bank's efforts to curb inflationary pressure," Sheikh Salem Abdul-Aziz al-Sabah said in a statement carried by state news agency KUNA.

Kuwait was named as the top candidate for a revaluation in a Reuters poll of analysts in March and markets piled pressure on the dinar, betting the central bank would allow an appreciation as the dollar slid to record low against the euro in April.  Continued...

http://www.reuters.com/article/economicNews/idUSL203860120070520

[Polly]

Regional currency to replace dollar in Argentina-Brazil trade

BUENOS AIRES, May 23 (RIA Novosti) - Argentina and Brazil, South America's two largest economies, will drop the U.S. dollar in favor of a regional currency in their bilateral trade starting in October 2007, Argentine Economics Minister Felisa Miceli said.

The countries' transition to a new currency, as yet unnamed, is part of a pilot project by the South American continent's major trade alliance, Mercosur, to replace the U.S. currency in internal transactions with money of its own, Miceli said.

Speaking ahead of a Mercosur ministerial session in Paraguay, she said the new currency should eventually spread throughout the bloc, which also includes Paraguay, Uruguay, and Venezuela.

Bolivia, Chile, Colombia, Ecuador and Peru have associate member status.

Argentine-Brazilian commerce topped $20 billion in 2006, with Argentina running a deficit of $4 billion.

Since its foundation in 1991, Mercosur's primary objective has been to remove obstacles to internal trade. But the recent admission of Venezuela made experts wonder whether the country's anti-American leader, Hugo Chavez, would try to turn Mercosur into a political weapon to undermine U.S. influence in the region.

http://en.rian.ru/world/20070523/65966459.html

[Polly]

Syria to End Dollar Peg, 2nd Arab Country in 2 Weeks (Update3)

By Zainab Fattah and Matthew Brown

June 4 (Bloomberg) -- Syria became the second Middle Eastern nation in two weeks to say it will dump its currency's peg to the dollar to curb rising import costs and inflation.

The country will link the Syrian pound to a broader range of currencies starting in the middle of July, central bank Governor Adib Mayaleh said.

``The decision is final,'' he said in a phone interview from Abu Dhabi. ``This will help stabilize the Syrian pound and bring down inflation.''

The shift away from the dollar among Middle East countries is a sign of the waning attraction of the currency for central banks around the world. The dollar made up 64.7 percent of global foreign-exchange reserves in the fourth quarter, down from 65.8 percent in the prior three months, International Monetary Fund data show. The euro's share was 25.8 percent, the highest since its 1999 debut.

Syria is broadening its peg after the country's currency was dragged lower against the euro by a 10 percent slide in the dollar last year, pushing up the cost of imports from Europe. Kuwait switched to a basket of currencies on May 20 because of gains in consumer prices, which are also accelerating in the United Arab Emirates and Qatar.

``The weaker dollar is fueling inflation,'' said Dorothee Gasser, an analyst at ING Bank in London. ``We see the U.A.E. as the next possible shifter.''

(snip)

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahGpyu4D9xBk&refer=worldwide

[The Smoking Man]

AHhahahahahahahahaha!!!! 

[Polly]

http://en.rian.ru/russia/20070605/66679704.html

MOSCOW, June 5 (RIA Novosti) - Trading in the Russian Export Blend Crude Oil (REBCO) futures will move from the New York Mercantile Exchange to a new commodity market in St. Petersburg, a deputy economics minister said Tuesday.

"Trading in the REBCO futures will move to St. Petersburg as soon as we register the new commodity exchange," Kirill Androsov said, adding that the new trading floor was expected to be launched before the end of the year.

The new blend, the third crude brand currently trading on the NYMEX, after WTI and Brent, is expected to replace Urals as Russia's price index used for calculating supply prices, export duties and mineral extraction tax.

REBCO is expected to fetch a higher price than Urals, generally priced at a $5-6/bbl discount to Brent, as its quality is much nearer to Western standards.

Androsov also said an oil exchange in Russia could be launched on August 1.

President Vladimir Putin said in his state of the nation address last year that Russia, as a leading oil exporting nation, should set up domestic markets to trade crude oil and derivatives in the national currency, the ruble.