I had written a beautifully lucid and intelligent comment on exchange rates, based on a piece in The Economist. But it’s gone now, and I’m off to sulk.

No, I think it is; it’s a much less-used international trade currency and as Matt says, the two biggest oil importers pay for their oil in dollar-linked currencies. If I was in combative mood, I’d also question John’s statement about the relative attractiveness of goods and services versus green bits of paper; the main oil exporters are the Arab oil states plus Russia, who might be quite happy to accumulate US assets for all sorts of geopolitical reasons. Also (see below) the big futures contracts are US$ denominated, which means that the carry relationship in oil futures is determined by the US interest rate rather than the ECB one.

by the way, Stephen, you’ve fallen prey to a couple of urban myths. People do not have to be net purchasers of dollars in order to buy oil; if you phone up Shell and say you’ve got a billion Ukrainian hryvnia, they will sell you some oil. In any case, even if you did have to buy dollars to buy oil, I doubt this would boost the US dollar as the sellers of oil would then want to convert your dollars back into kroner, pounds, roubles, dhirams or bolivars.

The only reason people believe all these odd things about oil is that the main oil futures contracts (NYMEX West Texas and IPE Brent) are denominated in US$. They are demoninated in US$ because the most likely reason that someone would be purchasing them would be because they are in the business of shipping oil to people who want it, and a random "person who wants oil" is more likely than not to be paying for it in US$. But there are smaller and less liquid oil futures which trade in all sorts of currencies. The US economy is mainly cushioned from currency fluctuations because it is actually a surprisingly closed economy (trade is about 10% of GDP).

It’s worth remembering that trading oil in US$ gives the US a number of big benefits. It creates demand for dollars as everybody has to buy dollars before they can buy oil and so keeps the dollar stronger than it would be. People don’t aim to maximise their dollars, but are forced to by the need to buy oil.

It also cushions the US economy from currency fluctuations.

If we traded in euro (as Saddam’s Iraq briefly did) the dollar would almost certainly collapse and the US$ price of oil would go through the roof.

If the amount of goods and services you can buy with a US$ falls, then the amount of US$ for which you will be willing to sell a barrel of oil (ceteris paribus) will rise, to keep the amount of goods and services that you obtain in exchange for your barrel of oil constant.

Matt is correct that it would be more honest to show the chart in terms of a weighted basket of currencies – however, that would’ve been less interesting (anyway, the euro is no *more* arbitrary a currency in which to denominate oil prices than the US$).