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
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.
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
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
“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.