Wednesday, December 27, 2006

United Arab Emirates Announces Dollar Reserve Reduction

Geez. As if on cue, after I wrote the What Your Wallet Is Up Against post right before this, Matthew Brown at Bloomberg reported from Dubai that today the U.A.E. announced it will be reducing its dollar exposure by 8%. I'm just going to cut and paste his article in full:
Dec. 27 (Bloomberg) -- The United Arab Emirates will convert 8 percent of its foreign-exchange reserves to euros from dollars before September after the U.S. currency slumped this year, the country's central bank governor said.

The U.A.E. has started ``in a limited way'' to sell part of its dollar reserves, Sultan Bin Nasser al-Suwaidi said in an interview in Abu Dhabi on Dec. 24. ``We will accumulate euros each time the market appears to dip,'' as part of a plan to expand the country's holding of euros to 10 percent of the total from 2 percent today, he said.

The Gulf state is among oil producers including Iran, Venezuela and Indonesia, looking to shift their currency reserves into euros or sell their oil, which is currently priced in dollars, in the 12-nation currency. The total value of the U.A.E.'s current reserves is $24.9 billion, 98 percent in dollars and 2 percent in euros, al-Suwaidi said.

Gulf Arab energy producers will earn as much as $500 billion from oil sales this year, the International Monetary Fund forecasts. The region's central banks reserves represent a fraction of the currency holdings of state-owned investment firms such as Abu Dhabi Investment Authority which is estimated to have over half-a-trillion dollars under management.

The U.S. currency dropped to $1.3166 versus the euro from $1.3157 after al-Suwaidi's comments were published. It traded at 1.3160 at 12:05 p.m. in London.

``It is a recognition of the vulnerability of the dollar over the coming year,'' Simon Williams, economist with HSBC Holdings Plc in a telephone interview from Dubai, U.A.E. today.

Dollar `Vulnerability'

``This is not confined to the U.A.E. There's a general awareness across the Gulf of the benefits of diversifying currency holdings,'' Williams said.

The U.S. current account deficit widened to $225.6 billion in the third quarter, while oil producers in the Middle East and central Asia will run a surplus of $322 billion for all of 2006, according to the IMF. Total foreign holdings of Treasuries increased to a record $2.16 trillion in September, just under 50 percent of the $4.34 trillion outstanding.

China, the second-largest holder of U.S. debt, reduced purchases of U.S. treasuries by 1.7 percent in the first 10 months of the year, according to Treasury Department data.

The conversion of 8 percent of the reserves into euros will happen ``within 6 or 9 months,'' he said in his office at the central bank in the U.A.E. capital.

The share of foreign-exchange deposits held in dollars by OPEC oil producers, including Saudi Arabia and the U.A.E., fell to a two-year low of 65 percent during the second quarter, from 67 percent during the first quarter, Bank of International Settlements figures released earlier this month show.

Obviously the amount is only a small percentage from one place, but it denotes the tips of many icebergs. The last thing you're going to do as a foreign reserve banker is tell the market exactly what you're going to do. Sell high, buy low. Further, the percentage Treasuries held by foreign money is quite understated. It's impossible to know by how much, since that data isn't published anymore, but many hedge funds listed as US entities have a majority of their investment from overseas. Over the past few years, such loosely regulated funds are thought to have picked up the slack in the appetites of foreign central banks for US bond sales. Bottom line, there is plenty of unfulfilled demand for a Euro-based Oil Bourse in Iran.

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