Easwaran Kanason

Co - founder of NrgEdge
Last Updated: January 28, 2018
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Business Trends
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At the World Economic Forum in Davos this week, US Treasury Secretary Steven Mnuchin apparently expressed support for a weaker dollar. That was a major surprise. Historically, the US government’s policy has to been to support a strong greenback, given that it is the world’s reserve currency. A flip to support a weak dollar created a wave of alarm, that the US under Trump could be attempting to make its exports more competitive globally. It caps off a series of trade moves that alarmed America’s Asian allies, particularly China, as the US slapped steep new tariffs on Asian goods, from solar equipment to washing machines.

To be fair, the dollar has been in decline against almost all major currencies over the past year. Against the Euro, it has declined by 3.5% over the past month alone, and against the Japanese Yen and Chinese Yuan by 3.3%. Even the messy ongoing Brexit situation did not prevent the pound from gaining to the US, with the dollar sliding by 5.6%. This has contributed to the gains in crude oil prices over January, since oil is denominated in dollars. As traders moved to sell-off the dollar after Mnuchin’s comments, crude oil prices leapt – touching US$71/b for Brent and US$66/b for WTI.

Mnuchin later walked back on his comments, but announcements by the Trump administration do point to a preference for the advantages a weaker dollar can bring. For oil, that means stimulating demand – a cheaper dollar means cheaper oil in relative terms, particularly in energy hungry Asia. Will this continue over the rest of 2018? Most central banks are turning hawkish, and while the US Federal Reserve is likely to follow suit, stubbornly weak inflation in the US could tie the Fed’s hands in interest rate hikes. 

Then there is also the prospect of an accelerating trade war with China, which could retaliate with currency manipulation, or a collapse of the NAFTA, something Canada is apparently already anticipating. Any one of these could send the dollar lower. For oil prices, that’s bullish. Supply/demand fundamentals are good – the US crude just declined for a record 10th week, while demand is perking up – and any weakening in the dollar will only amplify gains.

Is this a turning point for the rise of the Petroyuan? Back in 2012, China planned to price oil in yuan using gold-backed futures contracts in Shanghai. China’s efforts to undermine the dollar’s global dominance is not a new story however it is also not in China’s interest to devalue $1.1 trillion of  US Treasuries it currently still holds. Could the world leading oil importer have a central role afterall in the pricing of oil in the future? 

Russia, Middle East and other selected Asian countries already accept payment in yuan for trade transactions. If Saudi Arabia adopts the yuan for its oil exports that will send a very strong signal to the world of a big shift. More so if China participates in the upcoming Aramco’s IPO, it may just solidify the move towards the yuan.

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