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Source link: http://archive.mises.org/4877/arabs-diversifying-out-of-us-dollars/

Arabs Diversifying Out of US Dollars

April 5, 2006 by

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.

{ 13 comments }

William April 5, 2006 at 9:16 am

I know the Ports deal hurt our best friend in the region. But that is not the cause. The Emir of Dubai seems to me to be a bit less emotional and more financially driven. So because the core issue is still the same. As the US prints more and more money, Arab nations and others are seeing their investments go down in value and are looking for alternatives.

The only solution is to stop printing currency and let the market set the short and long term interest rates. Then and only then will we see a return to massive foreign buying of dollar based assets.

Nat April 5, 2006 at 9:57 am

I hate to beat a dead horse, but Dubai Ports World is a government owned company. That is why I opposed the “Ports Deal.”

I would think most of us who post articles and comments on a blog named after Ludwig von Mises would oppose government owning the means of production.

J Henderson April 5, 2006 at 10:38 am

Nat: All libertarians ought to oppose, on principle, the State ownership of a ports management company in Dubai. However, that is not the issue decided by the U.S. government. The question up for consideration was whether the U.S. government should intervene in a private company’s decision to sell its property to Dubai Ports World. Who’s decision is it? Someone who opposes the Dubai Ports deal necessarily opposes private property rights and supports State intervention into trade (i.e. protectionism). Mises, Hayek, Rothbard and all free market economists have always upheld the right of individuals to trade with any party anywhere, even in communist countries where the State owned all the means of production.

Dave April 5, 2006 at 1:08 pm

J Henderson,

Your characterization of the deal as a simple free market transaction leaves a lot to be desired. Perhaps you should look into the history of Peninsular and Occidental Steam Navigation Company who really got going when they received a contract from the british admiralty to deliver mail to the Iberian peninsula and then another to deliver mail to Alexandria. They acquired a Royal Charter in 1840. Of course we all know the provenance of DPW. You might also look into the heavy lobbying done for this deal by Clinton, Albright, Browner, Downey, Dole, Vin Weber etc. Sure free market economists uphold the right of individuals to trade, but this deal is nothing but statist corruption.

Urbanitect April 5, 2006 at 2:26 pm

Since the government of Dubai is private property, doesn’t that make all “state owned” Dubai companies private enterprises?

Robert April 5, 2006 at 2:49 pm

And of course, that’s why Hillary Clinton, Bill Frist, Joe Lieberman, et.al. threw such a frothing-at-the-mouth hissy fit over the DPW deal–their unwavering commitment to opposing statist corruption.

Damien April 5, 2006 at 4:06 pm

It seems that the red herring here is getting all the attention once again. The ports deal is inconsequential in comparison to our nation’s dependence on foreign capital.

I don’t care if you think this is a free market issue, state sponsored world domination or protectionism run amok, because the US dollar is about to run off a cliff while everyone is worried about our ports.

I’m sure there’s a hackneyed joke about the Titanic in there somewhere, but really, what’s the point?

Dave April 5, 2006 at 4:31 pm

I think most people on this site know the dollar is about to run off a cliff it has been running toward it since before 1913. The question is why do you want to continue to prop up a fiat currency that you work harder and harder for but receive less and less in return? And why do you want to continue all of the government expenditures that the dollar is funding?

Should we really continue to place band-aids on severed limbs?

Peter April 6, 2006 at 7:08 am

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

But what do they keep the other 75% in?

bobo April 6, 2006 at 9:25 am

Do foreign currency transactions by central banks show up in euro dollar accounts (ala M3-M2)?

billwald April 10, 2006 at 11:14 am

Exactly why is it necessary to the USofA that the dollar remain the reserve currency?

averros April 11, 2006 at 12:19 am

billward –

Exactly why is it necessary to the USofA that the dollar remain the reserve currency?

It is very important.

Dollar’s current status as the world reserve currency produces a high demand for dollars, world-wide. If this confidense is lost, a lot of nations will start dumping dollars, thus rapidly increasing domestic supply of dollars.

Which is, basically, amounts to hyperinflation.

Hyperinflation is known to be self-accelerating, and quickly leads to complete collapse of the nation’s financial system, which severely disrupts production of virtually everything. The modern economies are not geared up to work on a basis of barter.

Similar collapses in Asia and Russia were serious enough to noticeably negatively affect economies of all nations worldwide (and were somewhat arrested by the informal switch to dollars for the local trade). A financial collapse of the world biggest economy will bring on the cascade of collapses everywhere on the planet, since all government fiat currencies are inherently vulnerable.

This isn’t going to be pretty.

billwald April 11, 2006 at 10:05 am

Didn’t America make the most progress for the working class while the pound was the reserve currency?

There wasn’t hyperinflation in GB when the dollar replaced the pound.

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