Reuters: The Petrodollar Is Running out of Gas

Reuters warns of the waning power of the petrodollar

Thu, Jul 13, 2017 | 7422 Comments

We often get teased for warning on a semi-regular basis that the US Dollar isn't the pillar of strength that it's presented to be. 

Well, Reuters published a fun little column today about how the Saudis are running up a huge deficit—and won't be able to obediently gobble up US Treasuries like they usually do. 

What does this mean? As Reuters puts it, we are witnessing the "waning power of the petrodollar":

When the Federal Reserve begins reducing its holdings of U.S. Treasuries as expected later this year, some of the most consistent buyers of U.S. bonds over the last 15 years may be less than willing to fill the breach.

Before the financial crisis, the flow of "petrodollars" was one of the most powerful forces driving the U.S. bond market and the dollar, as oil exporters invested their booming trade surpluses into Treasuries.

But that flow isn't what it once was, and may be about to dry up further. The Fed's $1.7 trillion bond-buying stimulus has crowded out demand from oil exporters and their once huge trade surpluses have shrunk thanks to sluggish oil prices. Far from having plenty of fresh cash to invest abroad, these countries are shoring up finances and safeguarding stability at home.

[...]

With oil below $60 a barrel for the last two years -- below $50 for most of that time -- their finances are under pressure. In the short term, as has happened with Qatar recently, currency pegs may come under attack. In the long-term, domestic social and economic pressures will see foreign exchange reserves reduced, not increased.

OPEC countries ran a collective current account deficit in 2015 for the first time since 1998. Saudi Arabia's deficit last year was 8.7 percent of GDP compared to a surplus of nearly 30 percent in 2005.

When the Fed starts its gradual withdrawal from the Treasuries market, Saudi Arabia and other oil exporters are less likely to fill the gap than they would have been only a few years ago.

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Interesting times. 

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