as for all things geopolitical, and given the complex nature of the feedback mechanisms involved, there are no simple answers, but why the eur still stands at 1.2350 today has little to do with E101 economics... some pointers in there fyi: ... It can also be argued that a single currency works for the USA because the US dollar is a hegemonic currency. Before the euro, eighty per cent of the world's currency reserves were held in US dollars. This gives the US economy a huge subsidy in that reserve dollars are invested in US institutions or foreign institutions under US control. This subsidy helps cushion the effects of a possible strong dollar hurting certain regions of the USA. If the euro were to become either a hegemonic currency replacing the dollar or a co-hegemonic currency equal in reserve status to the dollar, some of the subsidy the USA gains would be transferred to the EU and help balance out some of the problems of the present heterogeneous economic structure still in place. A new reserve currency? The euro will probably become one of two, or perhaps three, major global reserve currencies. Currently, international currency exchange is dominated by the American dollar. The dollar is used by banks as a stable reserve on which to ensure their liquidity and international transactions and investments are often made in dollars. A currency is attractive for foreign transactions when it demonstrates a proven track record of stability, a well-developed financial market to dispose of the currency in, and proven acceptability to others. The euro will almost certainly be able to match these criteria at least as well as the U.S. dollar, so given some time to become accepted, it will likely begin to take its place alongside the dollar as one of the worldâs major international currencies. There are several benefits to reserve currencies of being such an internationally acceptable currency. If the euro were to become a reserve currency it would benefit member countries by lowering the service charges on their debts. Since the currency would be so broadly acceptable it would make the premiums paid to debt holders lower, since the risk to the borrower is lower. It is estimated that the American government currently saves 10-15 billion dollars a year on 2 trillion dollars of international debt because of this principle. The issuer of the reserve currency is freer to pursue macroeconomic policy adjustments to suit its own needs in terms of financing its debt, or influencing other countries. Reserve status would also lower the cost of many commodities for Europeans. The euro and oil The eurozone consumes more imported petroleum than the United States. This would mean that more euros than US dollars would flow into the OPEC nations, but oil is priced by those nations in US dollars only. There have been frequent discussions at OPEC about pricing oil in euros, which would have various effects, among them, requiring nations to hold stores of euros to buy oil, rather than the US dollars that they hold now. Venezuela under Hugo Chávez has been a vocal proponent of this scheme, despite selling most of its own oil to the United States. Another proponent was Saddam Hussein of Iraq, which holds the world's second largest oil reserves. Since 2000 Iraq had used the euro as oil export currency. In 2002, Iraq changed its US dollars into euro, a few months prior to the 2003 invasion of Iraq. If implemented by the OPEC, the changeover to the euro would be a transfer of a 'float' that presently subsidises the United States to subsidise the European Union instead. Another effect would be that the price of oil in the eurozone would more closely follow the world price. When oil prices skyrocketed to almost 50 USD/barrel in August 2004, the oil price in euros didn't change nearly as much because of the concurrent rise in the exchange rate of the euro to the US dollar (to an exchange rate of EUR 1.00 = USD 1.33 in December 2004). Similarly, should oil prices lower significantly, together with the USD/EUR exchange rate, the oil price in the eurozone would not fall as much. On the other hand, if the exchange rate and the oil price move in different directions, oil price changes are magnified. Pricing oil in euros would nullify this dependency of European oil prices on the USD/EUR exchange rate. On March 20, 2006, Iran is planning to open an International Oil Bourse (IOB, exchange) for the express purpose of trading oil priced in other currencies, including euros. Euro exchange rate Against other major currencies After the introduction of the euro, its exchange rate against other currencies, especially the US dollar, declined heavily. At its introduction in 1999, the euro was traded at USD1.18; on 26 October 2000, it fell to an all time low of $0.8228 per euro. It then began what at the time was thought to be a recovery; by the beginning of 2001 it had risen to nearly $0.96. It declined again, although less than previously, reaching a low of $0.8344 on 6 July 2001 before commencing a steady appreciation. In the wake of U.S. corporate scandals, the two currencies reached parity on 15 July 2002, and by the end of 2002 the euro had reached $1.04 as it climbed further. On 23 May 2003, the euro surpassed its initial ($1.18=â¬1.00) trading value for the first time. At the end of 2004, it had reached a peak of $1.3668 per euro (â¬0.7316 per $) as the US dollar fell against all major currencies. At that time, some analysts expected the dollar to continue to fall, a few even suggesting $1.60 per euro by the end of 2005, fuelled by the so called twin deficit of the US accounts. However, the dollar recovered in 2005, rising to $1.18 per euro (â¬0.85 per $) in July 2005 (and stable throughout the second half of 2005). The fast increase in US interest rates during 2005 had much to do with this trend.
(continued...) Drivers Part of the euro's strength in the period 2001-2004 was thought to be due to more attractive interest rates in Europe than in the United States. The US Federal Reserve had maintained lower rates than the ECB for these years, despite key European economies, notably Germany, growing relatively slowly or not at all. This is attributed in part to the ECB's duty to check inflation across the eurozone, which in high-performing countries such as Republic of Ireland is above the ECB's target. However, although the interest rate differential formed part of the backdrop, the main a posteriori justification for the euro's continuing ascent against the dollar was the concern over the huge unsustainable US current account deficits. The market has been awash with concerns about the US twin deficits, which have been a key driver of dollar weakness. The US budget deficit is about $427 billion, or 3.7% of gross domestic product (GDP), while the current accountâthe broadest trade measure since it adds investment flowsâhit a record $166.18bn shortfall in the second quarter of 2004. A key factor is that a number of Asian currencies are rising less against the dollar than is the euro. In the case of China, the renminbi was until recently pegged against the dollar, whilst the Japanese yen is supported by intervention (and the threat of it) by the Bank of Japan. This means much of the pressure from a falling dollar is translated into a rising euro. The euro's climb from its lows began shortly after it was introduced as a cash currency. In the time between 1999 and 2002, eurosceptics believed that the weak euro was a sign that the euro experiment was doomed to fail. It may be that its weakness in this period was due to low confidence in a currency that did not exist in "real" form. While the overt conversion to notes and coins had not yet occurred, it remained possible that the project could fail. Once the euro became "real" in the sense of existing in the form of cash, confidence in the euro rose and the increasing perception that it was here to stay helped increase its value. This effect was probably significant in the euro's decline and recovery between 1999 and 2002, but other factors are more significant since then. Another factor in the early decline of the euro was that many investors and central banks sold large portions of their legacy (national) currency holdings once the irrevocable exchange rates were set, as the goal of holding multiple currencies is to dampen losses when one currency falls. Once the exchange rates between eurozone countries were pegged against each other, holdings in German marks and French francs (for example) became identical. There is also some reason to believe that significant sums of illegally held money were sold for dollars to avoid an official and public exchange for euros.[citation needed] Consequences Despite the euro's rise in dollar-denominated value, as well as those of other major and minor currencies, the US trade deficits continue to rise. Economic theory would suggest that a fall in the dollar and a rise in the euro should lead to an improvement in US exports and a decline in US imports, as the former becomes cheaper and the latter more expensive. However, this depends to some extent on how currency costs are passed down the supply chain. Furthermore, the declining dollar makes foreign investment in the US cheaper (although also reducing the return), so that continuing foreign investment may underpin the dollar to some extent. The role of the dollar as the world's de facto reserve currency helps support both the dollar and the US budget deficit â but it depends on the continued willingness of foreigners to finance both. Central banks and others finance the budget by acquiring newly-issued, dollar-denominated US government bonds, which they need to acquire dollars for. If at some point foreigners become unwilling to accept new bonds at the prevailing interest rate (perhaps because the falling dollar is reducing the bonds' value too much), the dollar will fall even more â or the US will have to raise interest rates, which would reduce economic growth. There is speculation that the strength of the euro relative to the dollar might encourage the use of the euro as an alternative reserve currency; Saddam Hussein's Iraq switched its currency reserves from dollars to euros in 2000. Moves by central banks with major reserve currency holdings such as those of India or China to switch some of their reserves from dollars to euros, or even of OPEC countries to switch the currency they trade in from dollars to euros, will further reinforce the dollar's decline. In 2004, the Bank for International Settlements reported the proportion of bank deposits held in euros rising to 20%, from 12% in 2001, and it is continuously rising. The falling dollar also raises returns for US investors from investing in foreign stocks, encouraging a switch which further depresses the dollar. The rise in the euro should dampen eurozone exports, but there is little sign of this happening yet. The main reason is that the currencies of Euroland's major world-wide customers are also seeing their currencies rise relative to the dollar. As the current account deficits continue to rise and the US plans no austerity measures to curb foreign imports and increase exports, the situation may cause the US dollar to lose its position as a hegemonic currency replaced by either the euro or the euro and a basket of currencies. ....
my humble view... the reason i believe the impact of pricing oil (& other commodities) in euros would be fairly limited is, nothing stops any country today from converting as many $ in euros, then invest the proceeds in whatever european assets... reason they are not doing so on a big scale is the inherent lack of depth, transparency, fungibility, reliability, security, quality etc etc and the resulting lower velocity of exchanges of the european asset mkts, relative to the us (& uk) ones... and thats not about to change... let the iranians price their oil in rubles / yuan if they want to... just a matter of national pride for the countries whose currencies are involved...
Good grief ....the Dumb in you is strong There's no point in further discussion. I'd have to start the lesson from the beginning, which I'm not willing to do.
NOT ONE USD WILL BE MORE OR LESS DEMANDED (given perfect friction) IF CRUDE OIL IS PRICED IN SOYBEANS OR CHEESBURGERS OR PLAM OIL OR GRESASY WOOL OR WHEAT OR TIMBER OR '55 Chevy's or oatmealâ¦.or fire woodâ¦.orâ¦whatever⦠Can anyone tell me why the above is true? USD= just another commodity.
I'd have to disagree here. You seem like someone who ascribes to theory and also believes that theory holds its form in practice. If that were the case, it wouldn't be theory, since reality is imperfect and introduces the human element. The dollar is the current global reserve currency. If the europeans could purchase oil in euros and china in yuan and japan in yen, that would greatly reduce their demand for dollars. They would reduce their ratio of dollar reserves relative to non-dollar reserves. This reduction in dollar reserves would lead to less demand for the US dollar, thus depreciating the dollar. A falling dollar reduces the value of dollar-heavy forex reserves - prompting the gov's that maintain these reserves to reduce the proportion of dollar holdings even further, which in turn further depresses the dollar until a new equilibrium level is reached. This equilibrium level is probably well below today's current level. That was very basic, but I think a basic approach is necessary to truly understand an overly complex issue. We're talking about trillions of dollars in international currency flows that involve thousands of key decision makers, each with political and social pressures. The view of earth from a satellite is much different than the view of earth from a commercial airliner, wouldn't you agree? You can't see entire continental plates from a jet, but you can can from a satellite. "The devil is in the details" - there are times when it's appropriate to interprete this saying more literally. What does the halawa system and the Colombians have to do with this argument? The colombians laundered their money via businesses and investments. The Halawa system is based on trust and is ancient. I don't understand how they demonstrate the fungibility of commodities and cash any more so than the regular banking system or a regular business. Can you briefly explain?
Count up the total dollar value of all the above-ground oil, soybeans, sugar, corn, gold, etc. that is bought, sold, and speculated every day. There is a bank account denominated in USD holding that precise amount. Then add in expectations for future purchases (reserves) or accounts that are waiting to trade. That's the amount of USD "off the market". "parked", if you will. Reprice those assets in non-USD and that entire amount will need to find a new home. Anyone have a dollar figure on that? Has to be trillions.
yes, very... what matters is not whether they have the ability to pay in euros or not, what matters is what the receiving party will want to do with the euros... find me ONE good reason why suddenly people would want to hang on to those euros and invest them massively into the murky european asset markets... and if you find one such reason, why aren't people already converting their $ into euros / european-based assets as soon as they receive them from the buyers of their oil, colza etc??