December 8, 2007: It wasn't that long ago that interest rate decisions by the U.S. Federal Reserve Bank were a key factor in predicting the future trading range for the U.S. dollar. That is still the case, but the Federal Reserve Bank is no longer the only bank whose interest rate policy affects the value of the dollar. The announcement two days ago by the European Central Bank that interest rates in the eurozone would remained unchanged for the time being signal continued weakness for America's currency, reflecting the strength of the euro in international currency markets.

The value of the euro relative to the dollar has increased by about 70 percent since the introduction of euro currency in January 2002. A euro could be purchased then for only $0.86. In recent weeks it has cost American tourists visiting the Eurozone $1.45 to buy one euro.

Americans complain about the rising cost of gasoline and other petroleum products, with the price of oil recently near the $100 a barrel mark. The cost of gasoline has increased in Europe, too. However, since the price of oil on the world market is pegged to the dollar, price increases for countries in the euro zone have been cushioned by the increase in the value of the euro.

That cushioning effect enjoyed by Europeans in the eurozone is becoming a sore point with OPEC and other oil producing nations. Because of the dollar's decline in value, their increased revenues from the higher price for oil do not translate into increased purchasing power when petro dollars are exchanged for eurozone products. At the most recent OPEC meeting, Iran proposed abandoning the dollar as the sole currency for quoting the price of oil. Today Iran announced that it will no longer denominate its oil sales in U.S. dollars, and OPEC will decide on the Iranian proposal at its next regular meeting in Vienna on February 2, 2008. OPEC is reported to have discussed the dollar issue some time ago behind closed doors, and two years ago Russian President Vladimir Putin speculated publicly whether his country might price part of the oil it sells on world markets in euros rather than dollars.

Any move away from the dollar as a benchmark for the price of oil would further weaken the dollar's value on world currency markets – and strengthen the euro. China has already announced plans to diversify its vast foreign currency holdings, currently estimated to be worth some 1.4 trillion U.S. dollars. While the dollar continues to be the world's top reserve currency with 65 percent of worldwide currency reserves held in dollars, the euro is now the second most widely held currency portfolio. Its share of world currency reserves has increased from 18 percent in 1999 (when the value of the euro was set for participating countries) to 26 percent today. 60 countries around the world peg the value of their currency to the U.S. dollar, and some 40 countries link their currency to the euro.

The price of all major commodities traded worldwide is denominated in dollars, and about half the volume of total world trade is transacted using the dollar as the medium of exchange. With the dollar's weakness, however, that could change quickly. A first step might be OPEC setting the price of oil in euros for a portion of the oil it sells on the world market.

Does this sound impossible? No less than former Federal Reserve Chairman Alan Greenspan is now predicting that the euro could replace the U.S. dollar as the world's primary reserve currency. In an interview in September 2007 with the German weekly magazine "Stern", Greenspan said it was "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency." According to Greenspan, the dollar's lead over the euro is dwindling. The European Central Bank has "developed into a global economic force to be taken seriously," which is the reason why its decisions on interest rates in the eurozone impact the dollar-euro exchange rate.