USD dominance is declining – investors need to be watchful
The dominance of the US dollar is falling as Russia and Saudi Arabia look to the Chinese yuan for oil trade.
Indeed, a change in how global oil trading is undertaken will have major implications for economies and, as such, investors across the world.
As I was quoted by MSN, Financial Express, Mena FN and Value Walk, amongst other media, one of the most important conclusions of the three-day summit between Russia’s Vladimir Putin and China’s Xi Jinping last week was that Putin said Russia is now backing the use of the yuan for oil settlements.
This indicates that the world’s second-largest economy and the world’s largest energy exporter are actively moving to reduce the US dollar’s dominance as the anchor of the international financial system.
In addition, two deals unveiled last Sunday and Monday would see Saudi Arabia’s Aramco – one of the largest oil producers in the world – supplying two Chinese organisations with a combined 690,000 barrels a day of crude oil, boosting its status as China’s top provider of oil. Reports have also indicated that Saudi Arabia is in talks with Beijing to settle with the yuan rather than the dollar.
It would seem that US rivals, headed up by China, are establishing a new major economic bloc. Should Saudi Arabia move to the yuan, this would result in a mammoth shift in the global economic system.
Oil is one of the world’s most important and widely traded commodities and has traditionally been priced and traded in USD. Consequently, this has given the greenback a dominant role in global financial markets, as countries that wish to purchase oil need to first acquire US dollars in order to do so.
Therefore, if oil trading were to move away from the US dollar, it would radically reduce the currency’s demand, which would then result in a fall in the value of the currency. This could have numerous ripple effects throughout the global economy, such as massively increased inflation in the US and the potential for destabilising effects on financial markets.
Moreover, a move away from the dollar in oil trading could lead to heightened economic and geopolitical competition between countries.
Should the yuan become more broadly used in oil trading, it could considerably hike China’s economic power and influence, challenging the United States’ dominance in key global affairs.
These shifts are starting to occur in real-time, so investors may need to start revising their portfolios.
If oil were priced and traded in another currency, investors would then be exposed to currency risks as the value of the currency could affect the value of their investments. They would need to take into account the likely impact of currency fluctuations on their portfolio and have to make adjustments accordingly.
In addition, there are also industry-specific risks to consider. Organisations that generate substantial revenue from oil production or related services would be affected by changes in the currency used to trade. Investors with exposure to these firms would need to determine the likely impact of a move away from the dollar on their investments.
With oil being a crucial input for many industries, price changes can have massive implications for the global economy. If oil were no longer traded in the US dollar, it would affect the global financial system and have ripple effects throughout the world economy.
As such, investors who are serious about building their long-term wealth need to focus on the impact of the dollar’s decline now, not just in the future.