Greenback tumbles on reports of its demise

The price of gold is surging on world markets amid fears that the old economic order, based on the supremacy of the US dollar, could be breaking down.

A new spike has sent the cost of the precious metal to a level not seen before. The dollar slid sharply after yesterday's report in The Independent that Gulf Arab states are secretly planning to stop trading oil in dollars, and a senior UN official said that the US should be stripped of its position as the main source of currency reserves for other countries.

The developments come on top of speculation that the Obama administration is operating a policy of benign neglect of the dollar, engineering a devaluation that could help repair some of the economic damage caused by the recession.

Not since the collapse of the Bretton Woods system in 1971 has gold been treated as the equivalent of a world currency, but The Independent reported that it could form part of a basket of currencies that would be used for oil trading by the end of the next decade.

The dollar index - which measures the greenback against other currencies - fell 0.7 per cent yesterday and the dollar was lower against all major currencies except the British pound.

The US government's $11.86 trillion debt would be easier to repay if the value of the dollar was lower. There is growing concern among economists that the Obama administration could be content to see the currency fall. That would make US exports more competitive and could spark a manufacturing jobs revival.

Overseas governments are in a bind because they hold trillions of dollars as currency reserves. The situation is particularly sensitive for oil-producing nations, who are paid in dollars for their exports and therefore hold particularly high dollar reserves.

Gulf Arabs have begun planning n along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, which includes Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme.

The revelation was met with public denials yesterday. The Saudi central bank governor, Muhammad al-Jasser, said: "The future is in god's hands. Today, the conditions are good for the arrangement we have." The Japanese Finance Minister, Hirohisa Fujii, said he "doesn't know anything about it".

Dennis Gartman, the US investment guru who writes the daily Gartman Letter, said that no one should be surprised to hear denials. "We are certain that spokespeople for every single nation will be brought to the fore to deny that any such meetings have occurred, that no such decisions have been made, that it is not in anyone's interest to have held such meetings or made such decisions," he told clients as The Independent's story broke. "The market will care not a whit."

Simon Johnson, the IMF's former chief economist, said the countries involved would calculate it was not in their interests to drive the dollar down. " It would only be great news for the US. They have to pay lip service to the strong dollar policy, but if someone else were to engineer a devaluation, that would be lucky break for the US."

- THE INDEPENDENT