At a summit of leaders from Organization of Petroleum Exporting Countries members in Riyadh, Saudi Arabia, Venezuelan head Hugo Chavez and Iranian President Mahmoud Ahmadinejad indicated the historic link between crude oil and the dollar should be severed.
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Pravda.Ru has interviewed Dr. Nariman Behravesh, chief economist and executive vice president for Global Insight, and Dr. Christian E. Weller , senior fellow at the Center for American Progress and an Associate Professor of Public Policy at the University of Massachusetts Boston, to find out more about the tendencies connected with present-day US dollar setback.
Pravda.Ru: Can we speak here about a tendency of ditching the US dollar?
Nariman Behravesh: As a general comment, I don't take what Chavez and Ahmadinejad say very seriously, or in any way indicative of general trends in OPEC. Clearly OPEC and some Asian central banks are diversifying away from the dollar. This is a good thing. But it is only temporary. We believe that the dollar will strengthen again in late 2008 or early 2009 as the U.S. rebounds from its current downturn. The long-term trends (demographics, productivity etc.) are more positive for the U.S. than either Europe or Japan.
Christian Weller: The answer is yes and no. Yes, countries have been interested in general in diversifying out of the dollar. Japan, for instance, has been shifting its assets out of dollars since 2001 (by admission of the BOJ). The Japanese holdings of US treasuries show a turnaround in 2004. In August 2004, Japanese investors held $699.4 billion in treasuries. By September 2007, this number had fallen to $582.2 billion. These figures should not be influenced by exchange rate fluctuations, but because the dollar has weakened it should have become easier for Japanese investors (and more attractive) to invest in dollars. The fact that this hasn’t happened just reemphasizes the point that overseas investors were looking to put their money elsewhere. China has been looking to diversify into other currencies for a while. The main reason is simply financial economics. Putting too many eggs in one basket exposes countries to too much exchange rate risk, as many countries have recently learned the hard way.
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