Thursday, July 19, 2007

Iranian Oil to be sold in Yen --- what does it mean

Bloomberg is reporting that Iran's Oil Ministry is asking its Japanese buyers to start paying them directly in Yen instead of first selling their yen to buy US dollars and then giving the dollars to the Iranian Oil Ministry's accountants. So what does this mean and does it mean war is more or less likely?

It means that the dollar is weakening and the Iranians, like anyone else, including private Russian citizens [h/t Big Picture] and the Chinese Central Bank, are diversifying. The United States is running massice current account and trade deficits and the investment income surplus for US owned assets in other countries is shrinking. Standard modeling indicates that a country with this set of circumstances should see its currency significantly weaken against the combination of currencies with large current account and trade surpluses. That is what is happening.

So under this portion of the story, the Iranians are being smart and trying to minimize their valuation risk, especially if the Iranian Finance Ministry's bureaucrats read the same reports that EconBrowser is linking to this week --- speculation is starting to rise that the Chinese Central Bank will at least allow for an acceleration of Yuan apprecation and may allow for a full and free float of the Yuan against the dollar and other currencies within the next couple of years. Seeing that the floating managed band yuan is one of the major supporters of the dollar from crashing further, getting out of dollars now is a good idea from a purely fiscal perspective.

We know that charging yen for their oil is a good idea for the Iranians, and it is a similiar idea that many other oil exporters are engaging in --- charging and collecting payments in non-dollar currencies. There is nothing too unusual here.

These changes are marginal changes and will not have significant geopolitical impact. The US Dollar will mildly decrease in value as it is slightly less needed as a unit of exchange, but the impact is miniscule. This is not a hostile act but it may be spun that way by economic illiterates and myopic nationalists. Instead it is an act that reflects the simple reality that the United States is overextended and becoming a little more risky than it used to be.

No comments: