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Economists predict a financial tsunami. The clash of the two titans has begun. The newly introduced 15-nation currency Euro is giving sleepless nights to the high and mighty Dollar. Well the falling dollar is just the beginning.

The only country to escape the perils of World War II was USA. With about 80% of the world's gold reserves and 40% of world's production, US was touted as a power to reckon with. A fixed exchange currency was established based on gold, the gold-dollar standard, wherein the value of the dollar was pegged as U.S. $ 35 per ounce of gold. Because gold was combined with U.S. bank notes, the dollar note and gold became equivalent, which then became the international reserve currency. However, the onslaught of the Vietnam War and the alluring stock market gains assured a steep decline in gold reserves. The U.S. Treasury was running out of gold and had only $ 10 billion in gold left. On August 17, 1971, Nixon suspended the U.S. dollar conversion into gold. Thus, the dollar was "floated" in the international monetary market.

Where oil is concerned, President Roosevelt saw to it that dollar dominated the international trade and became the reserve currency. Saudi Arabia, the largest oil producer with the largest known oil reserves, is the leader of OPEC and also largest exporter to US. It is the only member of the OPEC cartel that does not have an allotted production quota. It is the "swing producer", i.e., it can increase or decrease oil production to bring oil draught or glut in the world market. This enables it more or less to determine prices.

Non-oil producing countries, such as most underdeveloped countries and Japan, first have to sell their goods to earn dollars with which they can purchase oil. If they cannot earn enough dollars, then they have to borrow dollars from the World Bank or International Monetary Fund (IMF), which have to be paid back, with interest, in dollars.

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* Contributed by -
Swetha Narayanaswamy,
First Year M.B.A.,
ICFAI Business School, Mumbai.