The realtionship between the US dollar and Oil

[Ironers]

Can someone explain to me exactly what the relationship is bewteen the US dollar and oil. Specifically, why is Iran and Venesuala (sp?) moving to the Euro when selling their oil such a threat to the US dollar?

[Old 33]

Let's set oil aside for a moment.


The U.S. Dollar, like most foreign currencies, is traded on the world market just like other goods. One U.S. dollar has a specific value, and is worth "more" or "less" than other currencies. For example, today's "exchange rates" show that one U.S. dollar is equal to:

0.49 British Pounds
0.73 Euros
1.12 Canadian Dollars
1.19 Australian Dollars
10.98 Mexican Pesos

In other words, today the British Pound is worth more than twice what the dollar is. The Euro is worth more than the dollar.

But the U.S. dollar is worth more than the Canadian and Australian dollars.





OK...the next thing you need to know is that a huge amount of U.S. dollars are held by foreign countries and foreign banks. They do that because the U.S. dollar is a safe investment...it's value is relatively constant, the dollar is backed by the full faith and credit of the U.S. government, etc. It's a good investment. And these foreign countries use their U.S. dollars to buy things on the world market, and sell their own goods in U.S. dollars. And then they hoard those U.S. dollars they get from their sales.




Now, when a country like Venezuela or Iran announces that it's going to sell oil in Euros rather than Dollars, that boosts the strength of the Euro and weakens the Dollar. Anytime a country sells something in Euros, it strengthens the power of the Euro. And if that country has switched from Dollars to Euros, it strengthens the Euro at the expense of the Dollar.

And when you're talking about literally billions of dollars a day in sales, that is a big deal. It's meant to hurt the Dollar, and in turn, hurt the U.S.

[Old 33]

To continue...

A weaker U.S. dollar means higher prices for Americans to buy goods from overseas. Oil is more expensive. Imported cars, electronics, clothes, etc. are more expensive.

On the other hand, it also means that U.S. goods are cheaper for foreigners to buy.

[Big Daddy]

Can someone explain to me exactly what the relationship is bewteen the US dollar and oil. Specifically, why is Iran and Venesuala (sp?) moving to the Euro when selling their oil such a threat to the US dollar?
Ironers, here is a link that will explain your question of the tie between the US dollar and the oil markets.

Link (http://www.informationclearinghouse.info/article11613.htm)

It will also go lead into the implications of Iran and Venezuala trading in oil with something other than the US dollar.

The county to watch, I believe, is Japan.
If they start trading in Euros, it would tip the scales and really hurt the value of the dollar. At least that was what I put together from reading about this stuff. I am not an expert, and only marginally understand economics.

Some people seem to get really touchy when you suggest that the US economy could tank because of this stuff. :idunno

Here is another interesting link from Yale University.
It is from an archive they maintain of old publications.
This one was written in 1720, well before oil and world monetary funds and stuff like that, when countries traded goods with monies backed by precious metals. Take the time to read it and you will understand more of how the world works and why countries today struggle of controlling a secure source of oil.

Link (http://www.yale.edu/lawweb/avalon/econ/trade1.htm)

If you get through these two links, let me know if you want one or two more that will clearify things a little more.

[Old 33]

The county to watch, I believe, is Japan.
Yep. And China.


Great links, Big Daddy! Great to see you again, too!

[Big Daddy]

Yeah, I especially liked finding that second link. If you can get past the old english, it really helped me understand the way world trade works between countries.

Great to see you again, too!
Yes, since the changes in the board, I see a lot of old familiar names.
It's all good!

[LoudRam]

Here's another article along the same lines. http://www.khouse.org/articles/2006/640/

[Ironers]

Thanks guys! Now alot more stuff is making sense.