UAE mulls dollar reserves cut

[HenryTo]

Something of interest - FWIW, I think they are late in the process, but we will see.
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Khaleej Times Online >> News >> BUSINESS
UAE mulls dollar reserves cut
BY ISAAC JOHN

13 July 2005

DUBAI — The UAE Central Bank is reportedly considering to convert some five per cent of its dollar reserves to euro, a move that signals a significant and far reaching trend among the whole Gulf Arab nations that have been seeking to reduce their reliance on dollar reserves.


The move, expected to prompt several other regional regulators to follow suit, is also in line with an increasing global trend among central banks to shift reserves away from the US and towards the euro zone, analysts say. Last month, Qatar triggered the regional trend by announcing that it was considering shifting some of its foreign exchange reserves into the euro given its fall.

Already, over the past couple of years, most members of Opec have cut the proportion of deposits held in dollars from 75 per cent to 61.5 per cent.

Although the UAE Central Bank's switch to euro may involve only $1 billion as its total dollar reserve is 98 per cent of its total foreign exchange assets, its ramifications could be great by adding to the woes of the dollar on the global currency markets while helping euro which had fallen more than 10 per cent against the greenback this year.

Close on the heels of UAE's reported move, the euro after hitting a 14-month low below $1.1870 last week, staged a rally above $1.22 yesterday.

While most analysts hailed the move by the UAE Central Bank as a dynamic currency allocation in line with a global trend during the past couple of years when more than 70 per cent of central banks increased their exposure to the euro, some believe that it is a measure taken to cushion the impact of a possible dollar plunge in the aftermath of the widely expected revaluation of the Chinese Yuan.

An official of the UAE Central Bank was yesterday quoted as confirming the comments made to Bloomberg News by Governor Nasser Al Suwaidi, in which he said the central bank might move 5 per cent of its reserves into euros because of the recent decline in the value of the currency against dollar. "The 5 per cent figure is correct — but this is only a maybe, it's nothing definite," said the official.

Although the official could not confirm how much of the bank's reserves are currently held in dollars, according to data from the International Monetary Fund, the bank had about $18.5 billion in foreign exchange reserves as of 2004.

The report quoted the Bank of New York as saying that any switch in UAE’s reserves to euro from dollar may only involve $1 billion "but talk that euro's looking cheap could well prompt similar switch by other central banks. If other central banks feel the US dollar's rally is living on borrowed time, they too may consider the euro to be within striking distance of its nadir and hence reports that Qatar and the UAE may revise the process of reserve diversification could be the first of many to come."

In the three years to 2004, the euro gained nearly 60 per cent against the dollar, due partly to expectations central banks in the Middle East and Asia are diversifying away from the falling dollar into the euro. But in recent months higher US interest rates have boosted the dollar's yield advantage over the euro with concerns about the future of the political and monetary union in Europe weighing on the single currency.

"Any rebalancing of central bank reserve portfolios has serious implications for the global financial system as the US has become increasingly dependent on official flows of funds to finance its current account deficit, estimated at $650 billion in 2004. The consensus among economists is that the US current account deficit will increase to $694 billion in 2005. At the end of 2003, central banks held 70 per cent of their official reserves in dollar-denominated assets and central bank purchases of US securities had financed more than 80 per cent of the US current account deficit in 2003. Any reluctance to increase exposure to dollar assets further could cause the greenback to plunge on currency markets," analysts pointed out.