Dollar ‘will lose grip on commodity trade’
London, September 15, 2009
It won't happen next week, next month, or even five years from now, but a day will come when commodities are traded in a currency other than the dollar, says an investment expert.
"Yes, commodities could be denominated in other currencies,” said Mark Mobius, who heads Templeton Asset Management's Emerging Markets Group. This is already beginning,"
"Brazil and China recently reached an accord to utilise their own currencies on some trades. This has some rationale since China has become Brazil's largest trading partner surpassing the US."
The debate about commodities and their denomination has been fuelled by China, which holds vast amounts of US Treasury bonds and dollars. China in March floated the idea of the dollar being replaced as the world's major reserve currency.
Leaders of the world's top 20 economies meet in Pittsburgh later this month to discuss the global economy. Many think the subject of dollar losses -- down more than 60 percent against the euro since January 2002 -- is likely to come up again.
A freely floating alternative currency is a prerequisite, as is acceptance -- it took two world wars and the abandonment of the gold standard for the dollar to take over from sterling.
"It took decades ... for sterling to lose its reserve status -- long after the echoes of empire faded," said Frances Hudson, global thematic strategist at Standard Life Investments.
China has since backed away from the idea.
But the spectre has been raised high enough to make people think about alternatives -- the euro, the yuan or a basket such as the International Monetary Fund's Special Drawing Rights (SDRs) -- for commodities denomination.
"SDR is ... only a notional currency that exists primarily between central banks. It has no commercial role," said Chris Turner, head of foreign exchange strategy at ING.
Analysts more often than not cite the euro as an alternative currency for commodities because it is liquid.
But the euro is still in the early stages of its life cycle, it is still evolving and monetary policy, which assumes one-size fits all, in the region could spell the end of integration.
Acceptance is still an issue.
"When the United States introduced dollars as a common currency for the union, it took more than 100 years for all states to accept it as a real currency," said Ashok Shah, chief investment officer at London & Capital.
"Until we have another reasonably large, stable long-lasting currency, commodities will continue to be priced in dollars."
A freely tradeable yuan at the moment looks like a forlorn hope because China still depends on exports -- a large proportion of which go to the United States -- for growth.
It cannot afford to liberalise the yuan as its massive trade surplus could mean a stronger currency, which in turn could jeopardise exports, growth and political stability.
However fund managers favour the yuan for commodities pricing because China is a major consumer. Chinese demand growth for commodities is also among the highest in the world.
"The yuan will be a major global currency in time as China becomes a superpower," said David Murrin, chief investment officer at Emergent Asset Management.
Until then the status quo is likely to remain. That will be the case even if China has another go at the dollar, which when it falls makes commodities cheaper for holders of other currencies.
"If China can talk the dollar down periodically, its commodities purchases for stockpiles will be that much cheaper," said a Europe-based fund manager.
China is said to have bought vast amounts of copper for its stockpiles -- evidenced by stocks of copper in London Metal Exchange warehouses, which halved to about 256,000 tonnes in the middle of July from early April.
"We can't get rid of the dollar