Oil Bust Could End Dollar Domination
There is an overriding belief that the U.S. dollar can hold onto its status as the world’s king reserve currency simply because of petro dollars. But in recent years, a serious threat to this system has developed—and the risk of the dollar being dethroned is very real.
The U.S. dollar has reigned supreme since the end of WWII, when the Bretton Woods system gave it is initial power. With Bretton Woods’collapse in 1971, oil became its new saviour and kingmaker as the U.S. dollar became the prime currency for crude oil transactions.
In 1973, the U.S. made a pact with the Saudi King to conduct all crude oil trades in U.S. dollars—in return for U.S. protection of its oil fields. Because of world hunger for crude, the demand for U.S. dollars experienced a similar, sustained hunger.
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The major producers of crude oil had an abundance of dollars, which was recycled back into the system to purchase dollar-denominated assets. The consumers pay for crude oil in dollars; hence, they always have to keep a steady reserve of dollars, thereby maintaining a high demand for the the currency.
This is now under threat, and history risks being repeated.
The Bretton Woods system failed due to the over valuation of the dollar as spending increased over the war in Vietnam war and America’s Great Society programs.
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