Oil prices and the dollar

The relationship between oil and the US dollar has been at the heart of the way international economic relations have been organised for more than half a century.

International capitalism has relied on the US dollar as the basic reserve currency, and has therefore granted it an essential degree of stability for several decades despite the large external deficits run by the US and the periodic swings in its valuation in currency markets.

More than half of aggregate world exports are denominated in dollars; more than 80 per cent of all international currency transactions similarly involve dollars.

Loans made by the IMF and other multilateral institutions are denominated in dollars. More than 60 per cent of the foreign exchange reserves held by central banks of all countries are in dollar assets.

This has obviously meant huge seignorage advantages for the US. It has allowed the US economy to benefit from access to imports that can effectively be paid for simply by printing dollars, and has therefore allowed the US to run enormous current account deficits for prolonged periods.

The Hindu Business Online