Dethroning the Dollar: What If?

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"If the dollar lost its reserve status, gold's value would likely rise."

There could be far-reaching implications for commodities should the U.S. dollar lose its status as the world's reserve currency.

While such a move could mean more demand for commodities as a hard asset, or "store of value," if there were general distrust of all currencies, there are differing views on whether it would mean less currency-related fluctuations in pricing of commodities and just what the impact might be on producers around the world.

It also would remain to be see whether the world would go to the International Monetary Fund's Special Drawing Rights program - a reserve asset based on the value of a basked of four currencies - and whether commodity exchanges would automatically follow suit.

"This is an extremely hypothetical situation," said Sterling Smith, vice president with FuturesOne. "I'm not entirely sure it would work all that well."

Commodities such as oil are traded in dollars not only in the U.S. but also on some of the other major exchanges in the world, such as London. This means potential for changes in the supply-demand dynamics whenever the dollar makes a big move.

However, Mr. Smith said, exchanges likely would oppose that because it would take away arbitrage business - the ability to profit over price difference - as well as currency loyalty from customers wanting to buy or sell in home currencies.

But others, such as CPM Group precious metals analyst Carlos Sanchez, doubted any kind of new dominant currency would remove currency fluctuations from commodities pricing.

"Everything would be priced in SDRs," Mr. Sanchez said. "There would still be arbitrage opportunities. It would just be treated like another currency."

If the dollar lost its reserve status, gold's value would likely rise, analysts said. The metal's price is driven in part by investor demand, and in addition to buying gold as an inflation hedge, many also purchase it as an alternative currency.

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