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Tuesday, October 6, 2009

The Dollar Under Pressure

This may have been the big business news of the day.

The move would see oil priced not in dollars but in a unit based on a basket of currencies including the Chinese yuan, the Japanese yen, and a new currency intended for use by the Gulf emirates, according to a report in Tuesday's Independent newspaper. The paper added that the transistion from the dollar to a new currency will take almost a decade.

Finance ministers and central bankers have held meetings in Russia, China, Japan and Brazil to discuss the idea, which the Americans are aware of, the Independent said.

This news was first reported by the British newspaper the Independent. The Independent says that secret meetings have been occurring by several Gulf states to move to stop using the dollar to buy and sell oil on the open market.

Currently, oil, like most commodities, is bought and sold using U.S. Dollars. Under the plan reported, the Dollar would be replaced by a basket of currencies including the Chinese Yuan. The Dollar, as expected, plunged on the news. Domestic equities went through the roof. Each was up at least one and a half percent. Equities were up because of the belief that a weak Dollar would help multi nationals.

This isn't the first time that such an idea has been floated. Russian President Vladimir Putin floated a similar idea in January.

"The one reserve currency has become a danger to the world economy: that is now obvious to everybody," he said in a speech at the World Economic Forum.

It is the first time that a Russian leader has set foot in the sanctum sanctorum of global capitalism at Davos.

The consequences of this are pretty clear, directly at least. If oil is no longer bought and sold in Dollars, then demand for the Dollar weakens. That means the Dollar weakens, all else being equal of course. A weaker Dollar has all sorts of consequences of its own.

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