The sunset of the dollar

Since at least the end of World War 2, the US dollar has been the currency of choice in international markets, especially commodities markets and especially oil, supplanting the British pound sterling and, when the central banks of the world abandoned gold to back up currencies.

On the international spot markets, oil is priced and paid for in dollars. That means that a stringer dollar makes oil cheaper for the United States but more expensive for other nations, since they must spend more of their own currency to buy dollars to buy oil.

Now major oil suppliers are planning to get rid of the dollar as the oil currency with something called a "Special Drawing Right." If they do, it will ripple strongly throughout all internation markets and trading. In fact, The SDR is poised to become the de facto global reserve currency.

The response to U.S. efforts to cheapen the dollar in 2010 — 2011 was not long in coming. It came from four directions — IMF, Russia, China, and Saudi Arabia. Enter the new world money: Petro-SDR.

Less than a year after Obama’s declaration of a new currency war, the IMF released a paper that is a blueprint for implementation of a new global reserve currency called the Special Drawing Right (SDR), or world money.

On December 1, 2015, the IMF announced that the Chinese yuan would be included in the basket of currencies used to determine the value of one SDR. With China onboard, the SDR is poised to become the de facto global reserve currency.

China’s and Russia’s immediate response to the coming dollar collapse and rise of the SDR is to buy gold. (It’s not yet possible to diversify heavily into SDR denominated assets because there are very few SDR assets available.) Russia has acquired over 1,000 tons of gold in the past seven years, and China has acquired over 3,000 tons of gold in the same time. ...

Gold, yuan, and SDRs all have one thing in common — they are alternatives to the dollar. As momentum toward these alternatives grows, the role of dollars as a reserve currency could diminish quite quickly — like sterling’s role between 1914 and 1944. The result for dollar holders will be exactly the same as the result for sterling holders: inflation and lost wealth.

Iran has already announced it will not accept dollars for oil; it wants Euros. From February:

Over the weekend, a top official at Iran's state-owned oil company said the country had a strong preference for euros.

"Our top priority is to receive cash and oil [payments] in euro," Safar-Ali Karamati, a deputy director at the National Iranian Oil Company, told an Iran news outlet on Saturday.

But Iran is not a large producer and the Saudis are working on the SDR partly to foil Iranian economics. You can bet the Saudis won't be accepting Euros for oil.