Russia Drops Dollar Peg, Opts for Euros

dollar faceRussia has been easing off the dollar train since October, but now it looks like it’s finally dropping the U.S. dollar in favor of the euro. This is bad news, and it means a ripple effect for oil prices here as well (anyone else notice the prices starting to creep past $2/gal again?).

The full story is covered by the Financial Times in Russia ends de facto dollar peg and moves to align rouble with euro:

Russia said yesterday it had abandoned efforts to tie the rouble’s movement closely to the dollar and switched to shadowing both the euro and the US currency.

The move heightened expectations that other countries operating de facto dollar pegs, such as China, could follow suit.

With 81 per cent of Russia’s oil exports currently sold to Europe, the move also provoked fresh speculation that Russia could decide to denominate its oil in euros. Russia is the world’s second-largest oil exporter, behind Saudi Arabia.

“Russia has talked about the idea of pricing its oil in euros. If it is starting to put more weight on the euro in terms of its forex regime and reserves, then that speculation will be re-ignited,” said Ian Stannard, currency strategist at BNP Paribas

The world financial markets are slowly hedging their bets against the U.S. and with our spending spree at a record pace, it may not be long before other major oil-producing countries back off the dollar as well. The reality is that we’re already getting nailed at the pump because of the failing dollar, and I can shoot down damn near every one of the “positives” that the pro-fiscal-irresponsible economists have thrown out there:

  • U.S. manufacturing will go up as a lower dollar drives demand? Sure, if the raw materials are made in the U.S. and consumer goods stay at the same price rate so they can pay the same wages (unlikely).
  • U.S. food exports will go up? This one is true, but transportation costs associated with higher gas prices will cut into those new profits.
  • Tourism to the U.S. will boom? Sure, if they are willing to put up with the hassle of all the extra airport security and scrutiny.

Hell, even Greenspan is saying our uncontrollable debts are bad shit for the U.S.:

These swollen deficits eventually could threaten the economy by souring foreign appetites to invest in the United States, Federal Reserve Chairman Alan Greenspan has warned.

So far, foreigners are willing to lend the United States money to finance its twin deficits. The worry is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments.

That could cause them to unload U.S. stocks and bonds, which would send their prices plunging and interest rates soaring.

Delinking currencies is just one way to prove that the international community is ditching the dollar, the other is that world banks are loading their reserves up with euros and letting the air out of the dollar balloon.

The end result is huge inflation and skyrocketing interest rates, and it’s staring us in the face.

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