Currency fluctuation and its resultant opportunities for arbitrage constitute one of the oldest non-productive ways to make -- vs. earn -- money. The U.S. dollar has long been viewed as the world's safest currency -- albeit not the most stable (hat tip to Dick Locke) -- for valuing global commodities. At least until now. The Independent confirmed this morning that "In the most profound financial change in recent Middle East [and world] history, Gulf Arabs are planning -- along with China, Russia, Japan and France -- to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar."
As a partial explanation for the timing of this rout, The Independent reports "The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. ‘One of the legacies of this crisis may be a recognition of changed economic power relations,’ he said in Istanbul ahead of meetings this week of the IMF and World Bank." And moreover, "Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East" which is further proof that China is playing a key role in trying to upset the dollar as the world currency.
While these are troubling and ominous developments that we will be reading -- and no doubt writing -- volumes on over the coming months, companies need to think through (and have hopefully already begun doing so) the implications of which currencies denominate their contracts. The FX markets will be more tumultuous than ever before and no doubt arbitrage opportunities will exist through offsetting currency risk in global contracts where suppliers want to get paid in other currencies than the dollar.
Stay tuned for further Spend Matters analysis and commentary on this issue as well as its impact on precious metals -- already cascading through the markets today -- on our affiliate site Metal Miner.