Currencies are important for your investment portfolio, especially if you are a domestic investor, placing trades internationally. For so long, investors have looked to the US dollar in times of crisis. The simple reason has been that many raw materials, including OIL, have been priced in US dollars.
Big news today, after a series of geopolitical developments have occurred this week that could potentially disrupt the U.S. dollar’s status as the world’s reserve currency. Countries like Russia, Brazil, India, China, and South Africa have confirmed plans to develop a new currency, with Saudi Arabia, China, and other countries strengthening their economic ties. These events raise concerns about the future of the petrodollar system and its impact on the U.S. economy.
Key Geopolitical Developments and their Impact on the Petrodollar System
Saudi Arabia and China have forged a $12.2 billion deal to build a Chinese oil refinery and agreed on a $3.6 billion acquisition of a 10% stake in a Chinese refinery.
Saudi Arabia will join the Shanghai Cooperation Council as a “dialogue partner.”
China and Brazil will trade using their currencies, bypassing the U.S. dollar.
France and China completed their first Yuan-settled LNG trade, further side-lining the U.S. dollar.
These developments could cause havoc on the existing petrodollar system, established in the 1970s after the collapse of the Bretton Woods system. The petrodollar system has been a driving force behind the U.S. dollar’s status as the world’s reserve currency. As countries receive dollars for oil, they invest those funds back into the U.S., providing liquidity to financial markets and maintaining low-interest rates.
De-dollarization and Its Consequences
Countries like Saudi Arabia, the world’s largest crude oil exporter, have been using the petrodollar system for decades. If Saudi Arabia and other nations transition away from the U.S. dollar, it would reduce overall demand and increase borrowing costs for consumers and businesses, among other effects.
The New World Order: A Commodity-Backed Reserve Currency
As Saudi Arabia, China, Russia, India, and other countries strengthen their trade and economic relations, a new world order is emerging. With intentions to increase the use of national currencies in mutual settlements and coordinate energy exploration and policy, the groundwork is being laid for a commodity-backed reserve currency to rival the U.S. dollar.
The global financial landscape is rapidly evolving, with major players moving away from the U.S. dollar and exploring alternatives. As the new world order takes shape, it is really important to remain informed of what is happening and aware of the potential consequences of these geopolitical shifts. The emergence of a commodity-backed reserve currency could have profound implications for the U.S. dollar and the American economy in the years to come. As an investor, it is important to consider your strategy carefully alongside a qualified professional, some things to look out for:
1. Your diversification strategy – if the dollar weakens, think about global stock returns
2. Exposure to commodities – if a different currency takes over, do you have commodities to protect yourself?
3. The role of emerging markets – what is happening across the world in terms of investment performance.
To gain a better understanding of why retail sales are so important for investors, we invite you to read our previous article on this topic. Understanding the significance of retail sales can help you make informed investment decisions and navigate the rapidly evolving global financial landscape.