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Putin, Ahmadinejad and the New Currency Cold War

There is a sinister reason why the U.S. dollar is falling against all currencies, pushing the Canadian Loonie to parity and way beyond to US$1.25 in a year or so.

There is a Currency Cold War being waged by Russia, Iran and various allies such as Venezuela.

Putin wants to force the use of euros as a reserve currency instead of dollars for oil and other transactions, then eventually the ruble. This is simply a monetary version of the old Cold War, minus the missiles.

Alliances are falling along the usual lines: In Russia’s camp are America’s enemies or those strong-armed due to the fact that they are wholly, or mostly, dependent on oil or natural gas from Moscow. Like Austria.

The strategy is working in conjunction with the fact that the dollar weakens due to high debts, large military budgets and growing trade deficits. And as the dollar falls, not only do other currencies rise in value but  the value of “real” things increases too such as oil (now at US$83 a barrel, gold, copper, lead, steel).
 

A New Plaza Accord? No Dice

Some Americans are calling for a new Plaza Accord, or multi-lateral currency alignment, but count on the Russians to sabotage that or drive an irrational bargain.

All of this is negative for trading partners like Canada which has seen its currency soar against the U.S. dollar and Canadian manufacturers and exporters bleed.

The pain is also great for the Asian Tigers, friendly Saudis, Emirates and Japan which receive payment in American currency and obligingly keep the proceeds in dollars. They have taken a monstrous haircut in value of late and there is talk of earmarking some reserves in euros.

(By the way, the recycling of petrodollars into U.S. reserves is enormous and represents an interest-free loan to the Americans which they may not count on indefinitely. For instance, there is a special section of the U.S. Department of Treasury devoted to providing a special auction process for Saudi Arabia and its residents so they can buy billions in U.S. T-bills. And the fleet is in the Gulf and boots on the ground to insure the money keeps flowing, but that’s another story.)

The Currency Cold War is in its infancy but Americans are, and must take this very seriously.

The Russians intend to undermine the world’s only hegemon and its former enemy, the United States and President-for-life Vlad Putin and his KGB pals last year launched a ruble exchange for some deals.
 

What's Next?

A continuing drop in the U.S. dollar will have a number of interesting consequences:
-- Commodity prices will keep increasing, particularly gold as it’s a currency substitute to many.
-- China and other trading partners long on U.S. dollars, and under attack by protectionists in the U.S., will have increasing leverage over Congress.
-- Europeans will find their currency puts them into an uncompetitive position.
-- Europeans will find that Russia will try to scupper attempts to diversify energy supplies. Russia’s deal with Iran eliminates competition.
-- The Americans may end up with surplus dollars, no longer needed for reserves-currency transactions, which will force repatriation and inflation in their economy.
-- This is bad for Canada because what’s bad for America is bad for Canada.

Putin, Ahmadinejad and the New Currency Cold War (http://communities.canada.com/financialpost/blogs/francis/archive/2007/09/28/ahmadinejad-and-putin.aspx)