The US Dollar had enjoyed a significant rally since the middle of last year, partly due to the debt crisis escalating in Europe, taking the problems of the dollar out of the headlines. However, there are plenty of good reasons to believe that this rally is soon coming to an end as the dollar is back under attack again. Firstly, Iran and India announced that they will start trading crude oil using gold instead of the widely-used dollars. The fall was further accelerated when the Fed announced that it is going to keep the interest rates low until 2014.

The announcement of the Iranian and Indian oil for gold exchange was a direct response to the sanctions put on by the United States and the European Union. The official word has been that Tehran must be punished for its ambitions to develop a nuclear programme. The punishment has been in the form of sanctions against Iran’s oil exports, and now further sanctions against its central bank.

These dreaded sanctions are nothing short of financial warfare. This latest sanctions against Iran’s central bank cause an immediate shortage of dollars, and as a result, the Iranian rial plummeted 40% overnight, causing hyperinflations. But as the saying goes-for every action, there is a reaction-Iran retaliated by announcing that it will use gold as an alternative payment system. India has a large amount of gold and it is willing to trade it in exchange for oil.

These actions taken by Iran and India are not enough to severely damage the dollar. The damage would come if this development becomes a trend and other countries follow suit. It would substantially hurt the dollar if large economies like China and Russia abandon the US Dollar payment system and use the alternative payment methods like gold or other commodities; effectively bringing an end to the dollar as the world’s reserve currency.

Turning the pages of history, the US Dollar has been the only currency used to buy and sell crude oil since the early 1970s, and from that monopoly, the US dollar slowly became the reserve currency for global trades of most commodities and other goods. The result was a massive demand for US Dollar, pushing up its value. This gave the US government a vast pool of credit as all foreign countries stored their excess reserves in US Treasuries. However, the constant money printing has slowly eroded the value of the dollar, causing other countries to be more reluctant to store their foreign reserves in US Dollars and also to consider alternative payment methods for settling international trades.

With the US Dollar under attack by the Fed domestically and by foreign nations overseas the dollar will continue to decline in value leading theoretically to an incline in the gold prices.

Note: The blog is just an expression of the author’s opinion and cannot be deemed responsible for any losses incurred.