"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.
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The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.

"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.

I dont know that europeans want oil priced in euros. It would result in a very strong euro that would destroy german export industries.

There is the need for the creation of a global currency thats not in the control of any one country, that can be used for trading oil and other commodities.

Euro would be the numeraire only. That wouldn't increase net demand for the Euro. Think about the other end of the transaction on purchase.

Are you saying the euro wouldnt strengthen, if oil was priced in euros?

Changing the denomination of petrol to euros is likely still to weaken the dollar.

A further weakening dollar may tempt China to open the floodgates.

They are sitting on $700 billion of US dollars in their FX reserves, if they decide to change that denomination to euros...

It's not all about pure economics geckko...

It's a very powerful bargaining tool / weapon that the Chinese have acquired, largely, when most people weren't watching...

Imagine if the Chinese and US got into a shooting war over Taiwan? It would cost both sides hundreds of billions, probably trillions (an aircraft carrier or two and China blasted back to the 50s). It would seem like a bargain for the Chinese to instead bankrupt (or even threaten to bankrupt) the US economically, even if it did cost them several hundred billion.

I don't see this wall of potential purchasers lining up anywhere. Already you could argue that China & the petro-states are getting poor value for their Treasury purchases, but they are doing it (in China's case) to attempt to manipulate currency rates. If the Chinese dumped Treasuries, the yield should shoot through the roof to try and entice new buyers which is where I see the US economy being crippled.