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Arabs Diversifying Out of US Dollars

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04/05/2006

Protectionists rejoiced in rejecting a foreign investment by a Dubai company. Now the United Arab Emirates, Kuwait and Qatar are giving the protectionists what they wanted. The central banks of these countries are starting to diversify their reserves out of US dollars and into euros. With foreign investors owning 50% of all US Treasuries, I wonder how the protectionists plan to finance the massive national debt as well as the trade deficit while at the same time discouraging foreigners from investing in US dollar assets.

April 4 (Bloomberg) -- The United Arab Emirates, Kuwait and Qatar said their central banks are using currency reserves to buy euros, stirring up the foreign-exchange market and bolstering a rally in the 12-nation currency.
The Persian Gulf nations, whose oil profits lifted reserves 28 percent in the past 12 months to $35.8 billion, added to speculation that central banks increasingly view the euro as an alternative to the dollar. The three countries own less than 1 percent of global currency reserves. 
"We sold euros last year when the currency was high, and could buy again,'' Qatar's Central Bank Governor Sheikh Abdullah bin Khaled al-Attiyah, told reporters in Abu Dhabi. The emirate's policy is to hold as much as 40 percent of its reserves in euros, and as much as 90 percent in dollars, he said, and declined to give further details.
Currency reserves worldwide rose 12 percent over the past year to $4.25 trillion. International investors own 52 percent of all Treasuries at the end of January, and a study done for the Federal Reserve last September showed such holdings kept yields on 10-year notes down by about 1.5 percentage points. Members of OPEC held a record $77.6 billion of U.S. government debt at the end of January, Treasury department data show.
"What they do matters,'' said Jeffrey Young, head of currency research in New York at Citigroup Inc. "Their rapid reserve accumulation has been a large support for the dollar, so if they have less of a propensity to hold dollars then it will be important."
The U.A.E., whose reserves rose almost 30 percent last year, may agree to buy more of the 12-nation currency at the central bank's May meeting, said Sultan bin Nasser al-Suwaidi, the bank governor, at the meeting of Gulf Arab central bank Governors. The U.A.E. central bank issued a statement yesterday after holding its April board meeting that made no reference to diversifying its reserves. Al-Suwaidi had said ahead of the monthly meeting that there was a 50 percent chance the bank would decide to buy euros.
The U.A.E., the fourth-largest member of the Organization of Petroleum Exporting Countries, may sell dollars, boosting its holdings of euros to 10 percent of total reserves from 2 percent now, al-Suwaidi said in an interview in Dubai on March 29. The country has reserves equivalent to $23.4 billion. Oman holds 30 percent of its reserves in euros and sterling, and 70 percent in dollars, Hamoud Al Zadjali, president of the Central Bank of Oman, said.
 
U.S. Bonds
Members of OPEC, of which Kuwait is the fifth biggest, account for 3.5 percent of U.S. bonds held by governments, central banks and international agencies, more than Taiwan, Germany and Canada. Overseas investment helps reinforce the dollar's value, holding down U.S. borrowing costs and supporting consumer spending.
The U.S. government has financed its budget deficit for four years by relying on non-U.S. investors. They own about 52 percent of the $4.2 trillion of Treasury securities, up from 35 percent in 2002. A study done for the Fed last September said foreign demand lowered 10-year Treasury yields by about 1.5 percentage points.
"If U.S. interest rates are rising we have to be careful about our duration and maturity of the bonds,'' Sheikh Khalifa bin Salman al-Khalifa, Chairman of the Bahrain Monetary Agency, told reporters in Abu Dhabi. The Gulf state invests "primarily'' in U.S. securities, he said.

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