As the house of cards that US economy has recently been gets shaken up, the falling dollar will put pressures upon the states that are the main exporters of petrodollars as well as those who depend on export to the US market, though it's not clear how they will react. BTW, petrodollar exporters are generally not populist. If they were, they would be consuming more at home, rather than sending a lot of it abroad. As my dear Islamic Republic of Iran, which indeed has been populist, gets forced by sanctions, etc. to do many of the right things even against its Leader's will, it may very well be one of the countries best placed to weather the coming storm.
<http://www.ft.com/cms/s/743a52a2-3959-11dc-ab48-0000779fd2ac.html> Falling dollar puts pressure on Opec
By Javier Blas in London
Published: July 23 2007 22:01 | Last updated: July 23 2007 22:01
The falling US dollar is lowering the Organisation of the Petroleum Exporting Countries' purchasing power by up to a third, making the powerful oil cartel more reluctant to increase production and cut prices.
Although oil is trading near last August's record $78.65 a barrel, Opec calculations show that, when adjusted for the weaker dollar and inflation, an average of the 12 Opec members' crude oil prices has fallen in the past year.
The adjusted "Opec basket price" averaged only $43.60 a barrel in June compared with $44.30 a barrel in the same month last year, according to the organisation's latest monthly report.
Growing trade between Opec members, especially in the Middle East and North Africa, and the European Union is aggravating the problem because the pound and the euro have risen.
The dollar on Monday fell to an all-time low against the euro of $1.3844 and a 26-year low against sterling, at more than $2.06.
Mohamed Bin Dhaen al Hamli, Opec president, said at its latest meeting three months ago that the cartel was "concerned about the continuing weakness of the US dollar" because "this is having a significant effect on the purchasing power of oil producing countries".
Since then, the dollar has continued to fall against the euro and sterling.
Eric Chaney, a Morgan Stanley economist, estimates that a 10 per cent drop in the dollar against major currencies cuts Opec's Middle East members' crude oil purchasing power by about 5 per cent.
Adam Sieminski of Deutsche Bank said the refusal of the cartel to increase its production to force a drop in the oil price was "more understandable if the lower value of Opec's spending power...is taken into account".
But the decline in the value of the dollar is insulating some countries from high oil prices, which provides Opec with strong demand even as oil prices soar above $75 a barrel.
Non-Opec members, such as Egypt and Sudan, face similar problems to those of many Opec countries.
Oil prices fell on Monday on speculation that Opec would increase production this year. Brent crude oil, regarded as the best indicator of the global oil market, fell 83 cents to $76.81.
<http://www.reuters.com/article/bondsNews/idUSN1836248020070720> Petrodollars to flow into US Treasuries despite Iran Fri Jul 20, 2007 3:20PM EDT
By Lucia Mutikani
NEW YORK, July 20 (Reuters) - Iran's decision to switch some dollar-based oil revenues to the Japanese yen was negative for U.S. government bond market sentiment, but would not make a dent on the flow of petrodollars into Treasuries.
Analysts said although Iran held a small fraction of government bonds, its initiative to ditch the falling dollar was further confirmation of diversification away from the currency and related assets.
"It's negative for Treasuries overall because it does fit with the idea that there is a diversification away from the use of the dollar by various means," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. in New York.
Iran, the world's fourth biggest oil producer, confirmed this week it had asked Japanese customers to pay for crude oil in yen instead of dollars, a move it said was aimed at maximizing oil export revenue. It is locked in a row with the United States over its nuclear program.
Foreign purchases of Treasuries by institutions such as central banks and oil producing countries have helped keep government bonds yields lower in recent years even as the Federal Reserve raised its benchmark overnight lending rate to 5.25 percent.
But the dollar's poor performance has resulted in a gradual diversification in the composition of foreign central bank currency reserves.
"The proportion of money held by central banks in dollars is shrinking. It was once 70 percent and now it's in the mid-60s. Diversification is a key theme that is negative for the dollar and Treasuries, and that has been the case this year," said Crescenzi.
IDEAglobal currency strategist David Powell estimates Iran supplies about 15 percent of Japan's oil imports, roughly translating into $10 billion annually and suggesting little or no impact on petrodollar flows.
"It does not have a huge implication. They probably weren't keeping this $10 billion in Treasuries, more likely in short-term instruments. Iran is not a country that is flush with cash as other oil producing countries are," said Powell.
U.S. government data on Tuesday showed oil exporting nations raised their Treasury holdings by $9.1 billion to $121.3 billion in May.
When British holdings, viewed as including Middle Eastern accounts using London-based accounts, are factored in, about $42.2 billion worth of petrodollars were pumped into Treasuries in May.
"That is more than four times the annual sales in oil from Iran to Japan. Iran is not leading the trend for oil producing or Middle Eastern countries as far as the data shows us," said Powell.
<http://www.economist.com/finance/displaystory.cfm?story_id=8380713> Economics focus
The petrodollar peg
Dec 7th 2006
>From The Economist print edition
America should worry more about fixed exchange rates in the Gulf than the gently rising Chinese yuan
AMERICAN politicians and businessmen view China's undervalued exchange rate and its huge current-account surplus as the main cause of America's vast deficit. Thus next week a high-powered delegation led by Henry Paulson, America's treasury secretary, will fly to Beijing to persuade China to take measures to reduce its surplus. But are they heading to the right place? At the global level, the biggest counterpart to America's deficit is the combined surpluses of the oil-exporting emerging economies. They are expected to run a total current-account surplus of some $500 billion this year, dwarfing China's likely surplus of $200 billion (see chart).
Counting only the Middle East oil exporters, the surplus has surged from $30 billion in 2002 to an estimated $280 billion this year. One reason why this gets much less attention than the smaller $160 billion increase in China is that only a fraction of it has gone into official reserves, which are publicly reported. Most of it is stashed in government oil-stabilisation or investment funds, such as the Abu Dhabi Investment Authority, which are much more secretive than the People's Bank of China—but which probably hold just as many dollar assets.
"Surplus to Requirements: Current-Account Surpluses" <http://www.economist.com/images/20061209/CFN623.gif>
One big difference is that China is now allowing the yuan to rise against the dollar. The exchange rate is up by an annual rate of almost 7% since September. In contrast, the six members of the Gulf Co-operation Council, or GCC (Saudi Arabia, United Arab Emirates, Kuwait, Bahrain, Oman and Qatar), which account for virtually all of the Middle East's surplus, still peg their currencies firmly to the dollar. This is partly in preparation for the GCC's plan to adopt a single currency by 2010. But the bizarre result is that over the past four years of soaring oil prices, their real trade-weighted exchange rates have fallen.
The Gulf economies are running an average current-account surplus of 30% of their GDP, well in excess of China's surplus of 8%. Oil exporters cannot spend their windfall overnight and it makes sense for them to run a surplus when oil prices rise, as a buffer for when oil prices fall. Even so, one can have too much of a good thing. -- Yoshie
