Iran to sell oil in euros -- Moving towards dollar decline

January 3, 2007

Iran announced last week it will now use euros for all foreign transactions, including oil. Iran is the world's fourth largest oil producer. Iran will also convert all dollar-denominated assets held in foreign countries to the euro, as well.

What Iran’s move to the euro means:

This is another step towards a growing trend of countries moving out of the dollar and into the euro as a reserve currency.

• On December 27, The United Arab Emirates announced that they will convert 8% of the foreign currency reserves out of the dollar to the euro. This totals about $2 million.
• Venezuela and Indonesia have also begun moving their assets out of dollars to diversify their central bank reserves, which are heavy in dollars. This is often because oil must be traded in dollars per oil’s biggest customer, the U.S.

However, the growing trend away from the dollar is also because the dollar has declined over 10% in 2006, and many experts are predicting a further decline in 2007. This is because the Federal Reserve will probably lower rates to avoid a recession in the U.S., while the European Central Bank is raising their rate. This makes the euro even more attractive at a time when the dollar is less attractive.

Adding to the euro’s attractiveness is the number of countries who are attracted to the euro’s stability and who are trading in their own currency for it. These include Montenegro, Vatican City, and Monaco. In addition, 14 African countries that were former French colonies adopted the euro when the franc went away.

The dollar will probably decline slowly over the next 30 years, with many temporary upswings along the way. However, there is always a chance for a dollar crash, given the volatility in global markets.

Action steps:
The best hedge for a dollar decline is to make sure part of your portfolio is in three types of funds:

1. Foreign mutual funds, particularly Europe.
2. U.S. multinationals, which usually have already hedged against a dollar decline.
3. Hard asset or commodity funds, which tend to rise when the dollar declines. Check with your financial advisor to see how well diversified you are in these areas.

Source: Radio Free Europe / Radio Liberty web site, "Iran to Denominate Foreign Deals in Euros", December 18, 2006; International Herald Tribune, “Euro used as legal tender in non-EU nations”, January 1, 2007; “ UAE to sell dollars for euros", December 27, 2006.