David Woo, global head of foreign exchange strategy at Barclays, knows a hell
of a lot more about the FX market than I do. And it turns out that Woo doesn’t
dismiss the
oil-price denomination fallacy out of hand. In fact, he thinks there’s something
to it. Here he is in a Q&A
with FT readers:
What would be the effect if commodities including oil were priced in
a currency other than the dollar? William McMurray
David Woo: The impact on the US dollar would be negative.
The fact that the dollar is the main transactional currency for global trade
means that the world has to maintain minimum dollar balances to facilitate
international payments. If these dollar balances are no longer required, it
will be clearly harmful for the dollar. That said, we think the risk that
the pricing of Opec oil will soon move to a system based on a basket of currencies
is low.
I’m not convinced.
FX movements are the result of FX flows, not FX stocks. If
Fred has a trillion dollars under his mattress, that doesn’t affect the value
of the dollar at all. If he sells that trillion dollars for euros, however,
then the dollar will fall. Yes, there are trading accounts with large dollar
balances in them, although "large" is relative – I doubt they
have more than a couple of billion dollars in them at any given time. If all
those balances were converted into euros in one day, that might (or
might not) have a small one-off, one-day effect on the dollar-euro exchange
rate. If the move was into a basket of currencies, which would include the dollar,
then any effect would be even smaller. But such effects would in any event be
minuscule in the context of the trillions of dollars of FX flows which get traded
every day.
Now Woo is right that "the dollar is the main transactional currency for
global trade" – and, I might add, for the FX markets as well. There
really isn’t any such thing, for instance, as a euro-yen exchange rate: there’s
a euro-dollar exchange rate and a dollar-yen exchange rate, and the euro-yen
"cross rate" is computed from those two component rates. If global
trade and the global FX market moved out of dollars as the basic global reference
currency, that really would reduce demand for dollar liquidity, and
could hit the value of the dollar. But if the chances of oil being denominated
in anything other than dollars are slim, then the chances of the dollar losing
its reference-currency status in world trade more generally are infinitesimal.
(Thanks to Jesse Eisinger for the heads-up.)