Here come the petrodollars, back to save global asset prices

Bloomberg/Tracy Alloway and Sid Verma/4-24-2018

“The breakout in oil could further loosen financial conditions by pressuring the U.S. dollar. If benchmark crude rises “further through” $70 to $80 per barrel, sovereign wealth funds could diversify their foreign-exchange holdings — potentially creating a headwind for the beleaguered greenback, according to Mansoor Mohi-uddin, head of currency strategy at NatWest Markets in Singapore.

Over the past decade, changes in the Brent price were often positively correlated with the euro — particularly when the commodity exceeded the fiscal and current-account benchmarks of exporting nations. The relationship has largely vanished over the past 12 months but could return once again if oil prices continue to march higher.”

MK note: Gulf oil producers have always had a penchant for gold going back to Ibn Saud’s swap of oil rights in the 1930s for a very large stash of gold British sovereigns. Given the concern about the long term value of the dollar as a reserve holding, it is unlikely that wealthy producers would leave gold out of a petrodollar diversification strategy.  As in the past, that diversification is likely to be handled quietly and discreetly.

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