On Friday, June 16, 2006 Samuel Brittan wrote in the Financial Times (page 11) that “the most likely trigger for a dollar collapse would be a US housing market setback.” I read this with gratitude that someone was actually addressing this important global threat but I had to respectfully disagree. The greatest threat to the role of the US dollar as the international reserve currency, and indeed the global economy itself, is a sudden end to petrodollar hegemony.
After the US abandoned the gold standard in 1971 with the end of the Bretton Woods System there were signs that the US dollar was beginning to weaken. In a deal with the US government, Saudi Arabia ensured that OPEC would continue to trade oil using the US currency and then initiated the OPEC “oil embargo” of 1973-74. As the price of a barrel of oil quadrupled, countries around the world needed US dollars in order to purchase oil. This began a cycle that is known as “petrodollar recycling.”