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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (46528)	2/15/2006 8:32:54 PM
From: sea_biscuit	Read Replies (2) \| Respond to of 116555

I bet Japan buys oil in YEN right now even though the price is in $. ... You are probably making a horribly fatal assumption that just because something is priced in $US$ that it actually HAS to trade in US$. No. Take the case of a country like India which is a heavy importer of oil (or China or Korea or maybe even Japan). A large chunk of their imports is oil. If oil is priced in USD, then it is better for them to hold most/all the reserves in USD since one of the factors that could result in higher oil prices (i.e. the conversion rate) is eliminated. For these countries, the rising oil prices are bad news in and of itself. But if on top of that, the USD gets stronger, it is a "double whammy" for them. So they tend to hold most or even all their reserves in USD. Once their reserves are in USD, they would like to earn some interest on it until the time comes for them to spend it. Enter the US govt with its huge deficits. Those countries purchase the bonds that the US govt issues. The higher the oil prices, the higher the amount of debt that the US govt can sell. However, all this changes if oil is priced in another currency, either displacing the USD or even co-existent with the USD. Once again, the countries would like not to be affected by currency rate fluctuations, but if oil is not priced in USD, they would hold their reserves in whatever currency oil is traded. So this means, (a) their appetite for US bonds would diminish and (b) they would want to reduce their existing USD holdings.