Oil prices: Dollar vs Euro

[Bjorn]

Quote:

Originally posted by Drooper
If the market switched to a Euro contract then anyone holding only US Dollars (or any one of the many other currencies that exist in the world) would do the same.

Don't you think it would have any impact on the value of the dollar if they all sold dollars at the same time?

[Drooper]

Quote:

Originally posted by Bjorn
Don't you think it would have any impact on the value of the dollar if they all sold dollars at the same time?

If you are referring to the post above where someone postulates that oil importes hold Dollar reserves to purchase oil? Well they don't.

I don't hold foreign currency in order to purchase foreign goods. I just buy the currency as I need it.

Take the small picture. You live in the US, I llive in Ireland. Imagine I wanted to buy something off you and it was priced in Dollars (say $100). I would go to the bank and buy Dollars with my Euro and give them to you and you then stick those Dollars in the bank.

Between us we are net buyers of $100

Now imagine that the price is in Euros. So I give you, say, €85 and you give me the widget. Then you go to the bank and buy $100 and stick it in the bank.

Between us we are net buyers of $100.

Now substitute "X barrels of oil" for "widgets" in the example above. See, no difference on the FX market.

All that really matter is who wants to hold which financial assets (meaing US Treasuries, US equities, US companies or German Bonds, German equities, Japanese bonds, etc.) It makes no difference to this whether oil is priced in $US, Euro, Yen or whatever.


It all goes back to my earlier post. The currency is just the numeraire.

[Bjorn]

You wrote: If the market switched to a Euro contract then anyone holding only US Dollars (or any one of the many other currencies that exist in the world) would do the same.

And my question is still: Don't you think it would have any impact on the value of the dollar if they all sold dollars at the same time?

Finacial Times and others wrote two days ago:

Quote:

The US dollar wobbled on Thursday as Junichiro Koizumi, the Japanese prime minister, appeared to hint that Tokyo was considering diversifying its reserves away from the greenback.

Reuter had this, three weeks ago:

Quote:

Asian currency authorities scurried to control damage on Wednesday after a South Korean document referring to diversification of foreign exchange reserves sparked an across-the-board dollar sell-off against major currencies.

.............. any change to the composition could have an immense impact on exchange rates, particularly as Asia's purchases of dollar assets have effectively funded the United States' gaping current account and budget deficits.

[Drooper]

Quote:

Originally posted by Bjorn
You wrote: If the market switched to a Euro contract then anyone holding only US Dollars (or any one of the many other currencies that exist in the world) would do the same.

And my question is still: Don't you think it would have any impact on the value of the dollar if they all sold dollars at the same time?

Finacial Times and others wrote two days ago:

Reuter had this, three weeks ago:

I can see why that quote (of mine) confuses you. I doesn't make any sense to me now either

Best just to scratch that sentence, with my apologies, and return to the point. The point being that if oil contracts were priced in Euro, there would be very little implication for FX markets - see my simple exmaple above why there would be no net effect on FX demand for US Dollars.



So with that out of the way, I can address your apparent point, which is somewhat different. You are talking about people holding US Dollar assets. This is completely different and separate from the original subject of this thread and my posts.

It is true that if foreign central banks reduced their holdings of US assets then it would likely put some downward pressure on the Dollar by creating excess supply for Dollars. So the Dollar migt depreciate a bit. But that doesn't matter, becasue that is what currencies do. At a later time it would appreciate again.

Take a tip from me. The next time you read an article about how the whole world will dump US Dollar assets, think about who exactly they sell them to. Someone must buy them and if nobody wants them (say US Treasuries) the price will fall. As the price falls the yield on these instruments increases and people stop and think "hey these are pretty good value. Let's buy some." So you would never get everyone dumping US Doillar assets en masse. Furthermore, if there was this "readjustment" official reserves, there could be some effect on FX markets. However these would be swamped by the other sources of supply and demand for FX every day of the week. Any concsequent effect on the currency would be small in comaprison to the normal volatility in the Dollar - note that over the last 30 years it has appreciated and depreciated by more than 20% in a year.


So to summarise:

Oil priced in US Dollars - doesn't matter
Pepole selling US Dollar assets - some effect, but grossly overstated by most (including the FT)


[postscript]

And apply some sceptic ligic to claims that Asian countries will dump US Dollar Reserves in a major way. This would not be a particularly sound thing to do if you had an exchange rate pegged to the US Dollar - as many of these countries do.

[Q-Source]

Quote:

Originally posted by Drooper
If you are referring to the post above where someone postulates that oil importes hold Dollar reserves to purchase oil? Well they don't.

They do hold international reserves in USD that come from trade.

Quote:

I don't hold foreign currency in order to purchase foreign goods. I just buy the currency as I need it.

Take the small picture. You live in the US, I llive in Ireland. Imagine I wanted to buy something off you and it was priced in Dollars (say $100). I would go to the bank and buy Dollars with my Euro and give them to you and you then stick those Dollars in the bank.

Between us we are net buyers of $100

Now imagine that the price is in Euros. So I give you, say, €85 and you give me the widget. Then you go to the bank and buy $100 and stick it in the bank.

Between us we are net buyers of $100.

Now substitute "X barrels of oil" for "widgets" in the example above. See, no difference on the FX market.

All that really matter is who wants to hold which financial assets (meaing US Treasuries, US equities, US companies or German Bonds, German equities, Japanese bonds, etc.) It makes no difference to this whether oil is priced in $US, Euro, Yen or whatever.


It all goes back to my earlier post. The currency is just the numeraire.

Oversimplification. It is not just a numeraire.

Whether or not oil price is fixed in dollars or euros does matter, since we have to consider the purchasing power of dollars versus euros. When you want to buy a widget that costs 100 dollars and go to the bank to buy dollars, you can buy cheap or expensive currency depending on the exchange rate dollar/euro of that specific day. You are going to pay less euros for 100 dollars, if it is depreciating or you are going to pay more euros for the same 100 dollars if it is appreciating.

Belem

[Bjorn]

Quote:

Originally posted by Drooper
I can see why that quote (of mine) confuses you. I doesn't make any sense to me now either

Best just to scratch that sentence, with my apologies, and return to the point. The point being that if oil contracts were priced in Euro, there would be very little implication for FX markets - see my simple exmaple above why there would be no net effect on FX demand for US Dollars.

Which I'm not sure if I agree with, but more about that later.

Quote:

And apply some sceptic ligic to claims that Asian countries will dump US Dollar Reserves in a major way. This would not be a particularly sound thing to do if you had an exchange rate pegged to the US Dollar - as many of these countries do.

Many of them don't, Japan doesn't.

The best reason I've seen so far for, say, Japan, not starting selling their dollar reserves is that it would reduce the value of the rest of those dollar reserves (and they are substantial) and a dollar falling even more will hurt their export industry.

Which, of course, doesn't change my POV that the dollar would fall if too much of it comes up for sale - I think we agree on that.

As for the FT exaggerating, MSNBC said this:

Quote:

The dollar had fluctuated Thursday on remarks by Japanese Prime Minister Junichiro Koizumi about possibly diversifying the nation's massive foreign reserves. Japan is the world's top holder of foreign reserves, mostly in U.S. Treasury bonds, and some traders saw the remarks as a reason to sell the dollar.

Bloomberg:

Quote:

Japanese Prime Minister Junichiro Koizumi said March 11 his country needs to consider diversifying its foreign-exchange reserves, the world's largest. The comments helped send the dollar to a two-month low against the euro. Japanese investors are the largest foreign holders of U.S. Treasury securities.

[Q-Source]

At the end of the day the OPEC fixes the oil price in terms of dollars. If the dollar is falling against any other currency, then it means that the OPEC members are going to lose profits from this, since the purchasing power of the dollars they get from selling oil will be lower than before. So it does matter whether or not they decide to price the oil in dollars or euros.

The OPEC has two choices to protect their members against the dollar fluctuations: either it switches to euros (which is a more stable currency) or it pegs the oil price to the dollar fluctuation (which has already been done) by increasing the oil price when the dollar value falls and reducing it when the dollar value rises, ceteris paribus.

Buyer countries would also benefit from switching to oil price in euros, since most of the oil contracts are priced for future sales. Therefore making contracts with a currency that has less ups and downs is less risky.

Belem

[Bjorn]

Quote:

Originally posted by Q-Source
Buyer countries would also benefit from switching to oil price in euros, since most of the oil contracts are priced for future sales. Therefore making contracts with a currency that has less ups and downs is less risky.

If we stick to the dollar and the euro, an up in one of them is a down on the other. In other words, I can't see how euros can have less 'ups and downs' than the dollar.

Is euro a more stabile currency than dollars in the long run? We don't know.

On the other hand, at them moment I make some money in Norwegian krone and some in dollars. I spend my dollars first.

[Q-Source]

Quote:

Originally posted by Bjorn
If we stick to the dollar and the euro, an up in one of them is a down on the other. In other words, I can't see how euros can have less 'ups and downs' than the dollar.

Well, yes and no. A frequent fall in the exchange rate dollar/euro implies that there are more downs than ups. It also means that the downs are higher in proportion than the ups.

Quote:

Is euro a more stabile currency than dollars in the long run? We don't know.

It is quite likely that the European Union will become an economic potency in the near future. It also depends on whether or not China and Japan become economic allies of Europe or the USA.

Quote:

On the other hand, at them moment I make some money in Norwegian krone and some in dollars. I spend my dollars first.

Good for you. I switched not long time ago all my savings from dollars to sterling pounds (and already made a significant profit). So, if individuals like us are already taking precaution against the dollar devaluation, don't you think that big corporations, banks and rich investors are doing exactly the same?

[Bjorn]

Quote:

Originally posted by Q-Source
Well, yes and no. A frequent fall in the exchange rate dollar/euro implies that there are more downs than ups. It also means that the downs are higher in proportion than the ups.

And it was the other way around just a few years ago.

Quote:

Good for you. I switched not long time ago all my savings from dollars to sterling pounds (and already made a significant profit). So, if individuals like us are already taking precaution against the dollar devaluation, don't you think that big corporations, banks and rich investors are doing exactly the same?

They are. If I remember correctly, I posted just a few days ago that Warren Buffet is betting 22 billion dollars that the dollar will continue to fall in the near future.

[Drooper]

Quote:

Originally posted by Bjorn
[b]Which I'm not sure if I agree with, but more about that later.

Many of them don't, Japan doesn't.

The best reason I've seen so far for, say, Japan, not starting selling their dollar reserves is that it would reduce the value of the rest of those dollar reserves (and they are substantial) and a dollar falling even more will hurt their export industry.

Which, of course, doesn't change my POV that the dollar would fall if too much of it comes up for sale - I think we agree on that.

As for the FT exaggerating, MSNBC said this:

Bloomberg:

All those articles come from a single news wire report. The FX market volatility is just what FX markets do - it means nothing in the greater scheme of things.

I have seen this story more than once before. It was overhyped hysterior then and it is the same now. If official agency around the world start dumping US Treasury, it will stimulate a fanstastic buying opportunity at a time when Euro bond are yielding nothing and presumably would yield even less if this happened.