Dollar pricing of oil under China, Gulf states threat

LONDON: Gold prices hit a record high yesterday, as renewed speculation about the

declining power of the dollar as the world’s reserve currency sent investors stampeding into commodities.

Reports that secret talks had been held between China and Middle Eastern states about changing pricing of oil from dollars to a basket of currencies and gold sent the greenback into a renewed slide on foreign exchange markets, despite denials from the governments involved. By late afternoon the euro was up by 0.7 per cent against the dollar at $1.47.

Share prices also rallied yesterday, as investors’ hopes that global recovery was gaining ground were boosted by news that the Australian central bank had become the first to increase interest rates since the world recession began.

Julian Jessop, of research house Capital Economics, said gold prices could push even higher, but it would fall back in the longer term.

“A mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices,” he said adding that although gold supplies are finite — a quality that attracts die-hard enthusiasts nostalgic for the days of the Gold Standard — periods of unusually high prices tend to see used gold, such as old jewellery, put up for sale.

“You can very quickly get a flood of gold back to the market,” he said.

Since the credit crisis, there has been growing debate about the role of dollar as world’s reserve currency, which has helped America to borrow cheaply from the rest of the world for decades.

World Bank president Robert Zoellick warned that US could not take the dollar’s status for granted. “Looking forward, there will increasingly be other options,” he said, and warned that confidence in the dollar would depend on how successfully Washington managed to deal with its deficits, and fix

the world’s largest economy without unleashing a bout of inflation.

Steps have already been taken to loosen the dollar’s grip: Iran has begun pricing oil exports in euros; China recently launched the first yuan-denominated bond open to outside investors in a step towards making its currency exchangeable on international markets; and Asian central banks are piling reserves into gold as well as Treasury bills that have been the favoured investment for the past decade.

China, Russia and other emerging market governments have complained bitterly at international gatherings about the overweening economic power of the US. “Throughout this year, China has questioned the dollar as the medium of exchange, and questioned the dollar as a store of value,” said Gerard Lyons, chief economist at Standard Chartered bank.

China and other developing countries that have earned a vast bounty by exporting cut-price consumer goods to the US over the past decade have been infuriated by the way the collapse of America’s banking system has sent shockwaves throu-ghout the world economy.

However, analysts said

it would probably take many years for the dollar to be replaced.