partly as a result of the debt crisis erupting in Europe, taking the
problems of the dollar out of the headlines. However, there are good
reasons to believe that this rally is soon coming to an end as the
dollar is back under attack again. First, Iran and India announced
that they will start trading crude oil using gold instead of dollars.
Then shortly after the Fed announced that it is going to keep interest
rates low until 2014.
The announcement of the Iranian and Indian oil for gold exchange was a
direct response to the sanctions put on by the United States and the
European Union. The official line has been that Tehran must be
punished for its ambitions to develop a nuclear weapon. This
punishment has been in the form of sanctions against Iran's oil
exports, and now further sanctions against its central bank.
These sanctions are nothing short of financial warfare. This latest
sanction against Iran's central bank caused an immediate shortage of
dollars, and as a result, the Iranian rial plummet 40% overnight,
causing hyperinflation. But, for every action, there is a reaction and
Iran retaliated by announcing that it will use gold as an alternative
payment system. India has a large amount of gold and it is willing to
trade it in exchange for oil.
These actions taken by Iran and India are not enough to severely
damage to the dollar. The damage would come if this development
becomes a trend and other countries follow suit. It would
substantially hurt the dollar if large economies like China and Russia
abandon the U.S. dollar payment system and use alternative payment
methods like gold or commodities; effectively bringing an end to the
dollar as the world's reserve currency.
The Reserve Currency
The U.S. dollar has been the only currency used to buy and sell crude
oil since the early 1970s, and from that monopoly, the U.S. dollar
slowly became the reserve currency for global trades of most
commodities and other goods. The result was a massive demand for U.S.
dollars, pushing up its value. This gave the U.S. government a vast
pool of credit as all foreign countries stored their excess reserves
in U.S. Treasuries.
This privilege gives the United States the ability to print large
amounts of currency to finance domestic programs at home and military
spending overseas. The inflation from this sort of money printing is
absorbed by the vast amounts of dollars circulating around the world,
so that much of the inflation is not felt back here at home.
Nevertheless, this constant money printing has slowly eroded the value
of the dollar, causing other countries to be more reluctant to store
their foreign reserves in U.S. dollars, and also to consider
alterative payment methods for settling international trades. The
latest action by the Fed to keep interest rates between 0 and ¼
percent through late 2014 is just one more action taken to undermine
the U.S. dollar.
From: http://seekingalpha.com/article/328272-the-u-s-dollar-is-under-attack
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