Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.
Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.





^^^ yup, higher US dollar denominated prices are coming not only for oil / gasoline, but also for every other 'world market' commodity (i.e. food, base metals, precious metals, etc.). We'll also see a US dollar denominated price increase for every imported product which originates in a country whose own currency is not pegged to the US dollar.
One major financial fallacy among most Americans is that they still tend to think that US dollars are a solid measure of 'real value' ... meaning that if their paycheck goes up by 3% in US dollar terms or if their stock shares go up by 3% in US dollar terms or if their bank account is earning 3% interest in US dollar terms they think that they are actually better off.
Increasingly, the US dollar is losing its 'reserve currency' status such that it is just one more currency to be thrown into the 'basket' - meaning that Americans need to realize that the true global 'purchasing power' of their US dollars is now much more volatile than at any time in recent history. Put another way, that 3% annual 'increase' in US dollar denominated earnings can be wiped out in less than a week (and recently was ! ) meaning that a 3% US dollar denominated increase really resulted in a 2% loss in terms of global 'purchasing power'
As you point out, from a US dollar centric point of view, this loss of global 'purchasing power' shows up as US dollar denominated price inflation. But Americans need to realize that for people living in other countries using different currencies may not be seeing the same increase in prices as denominated in their home currencies, those people only see an increase in their home currency exchange rate vs the US dollar.
This is also the 'engine' that drives the flow of 'hot money' from country to country. Right now, America is dependent on foreign investors for something like 3 billion dollars per day worth of new investment in American equities to offset the twin deficits. As the exchange rate of the US dollar falls relative to their home currencies, their 3% US dollar denominated rate of return on the US dollar denominated treasury bills they recently purchased also translates into a 2% loss in terms of their home currency. As with middle eastern 'petrodollars', when these foreign investors get tired of eating exchange rate losses that outweigh their investment earnings, there will be heavy pressure to sell US dollar denominated assets.
This of course will depress the US dollar exchange rate even farther, resulting in even higher US dollar denominated prices for all 'world market' commodities and imported goods, which will appear as even more price inflation within the USA !
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Last edited by Melonie; 12-11-2006 at 04:11 AM.
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