Britain's The Independent newspaper said on Tuesday that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the U.S. dollar with a basket of currencies in the trading of oil.
The U.S. dollar eased after the report, written by Middle East correspondent Robert Fisk and monitored on The Independent's Web site. It cited unidentified sources in Gulf Arab states and Chinese banking sources in Hong Kong.
It said the proposal was for trade in crude oil to move over nine years 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, including Saudi Arabia, the United Arab Emirates, Kuwait and Qatar.
While ending the use of the dollar as the currency used to settle oil trades between counterparties -- as Iran has already done -- would be relatively easy, replacing the currency in which oil is priced would require a massive effort, analysts said.
The report did not make clear how the change would work, and many analysts doubted it would occur any time soon, despite mounting speculation about the dominant role of the U.S. dollar in global commodity trade and as the world's main reserve currency.
I don't think we will see much concrete action coming out of such discussions because even when the dollar is weak, it doesn't mean that commodities are undervalued, said David Moore, commodities analyst at the Commonwealth Bank of Australia.
In fact, when the dollar weakens, commodities prices tend to increase by a higher ratio.
For growing oil producers and consumers, a shift to settling trade in non-dollar currencies may hold some appeal: oil exporters would be able to more easily diversify their currency reserves away from the U.S. dollar; importing nations could pay for their oil without the need to buy dollars.
But apart from the strong political links between Gulf nations and the United States, the lack of convertibility for many Gulf currencies and China's yuan tops the list of practical hurdles for making such a shift.
First, they will need to select a basket of currencies and issues surrounding that are: which are the currencies to be included in the basket and what ratios to use, said Victor Shum, an energy analyst at Purvin & Gertz Consultancy in Singapore.
It's already a big hurdle just to move oil from one currency to another, let alone a basket of currencies. If there was already a significant proportion of global oil trade being priced in non-U.S. dollar now, than perhaps there would be more pressure to price crude in another currency. But we're still far from that.
Sources with refiners in Japan, China and South Korea all said they had not been approached by any oil suppliers about changing the terms of their settlement for crude oil purchases.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars, said the report, adding that France had also been involved in the talks.
The Independent said U.S. authorities were aware that the meetings had taken place but had not discovered the details and were sure to fight this international cabal.
If such a scheme could be pulled together, it would be more negative news for the already ailing U.S. currency, said Jonathan Cavenagh, currency analyst at Westpac.
This...shows that central banks not just in Asia are looking to diversify away from the dollar.
Iran began settling most of its crude oil exports in non-dollar currencies, primarily the euro, several years ago, but the actual price for its oil is still set in dollar terms.
The U.S. dollar dipped in the wake of the report, with analysts cautious about reading too much into it, particularly given the complexities of such a plan and a nine-year timeframe.
The dollar index, a measure of the greenback's performance against six major currencies, fell 0.24 percent in morning trade, taking its losses to nearly 6 percent so far this year as investors seek higher-yielding assets overseas.
The euro edged up to $1.4691, from $1.4662 before the news broke, while the dollar eased to 89.00 yen from 89.40. U.S. crude oil futures pared light early losses to rise marginally after the news, a move attributed more to the dollar's weakness than any direct impact from the article.
This looks to be a very long-term thing with a few hurdles to cross, said Cavenagh. Foremost, China needs to be more flexible with its currency.
To see The Independent's story, click on: http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
(Additional reporting by Fayen Wong in Perth and Anirban Nag in Sydney)
(Reporting by Wayne Cole; Editing by Mark Bendeich and Dayan Candappa)