U.A.E. to sell dollars for euros

U.A.E. to sell dollars for euros
By Matthew Brown
Copyright by Bloomberg News
Published: December 27, 2006

ABU DHABI: The United Arab Emirates plans to convert 8 percent of its foreign-exchange reserves to euros from dollars before September, the latest sign of growing global disaffection with the weakening U.S. currency.

The U.A.E. has started, "in a limited way," to sell part of its dollar reserves, the governor of the country's central bank, Sultan Bin Nasser al-Suwaidi, said in an interview. "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 the current 2 percent.

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 now priced in dollars, for euros. The total value of the reserves held by the U.A.E. is $24.9 billion, Suwaidi said.

The dollar has fallen more than 10 percent this year against the euro.

Part of the reason for the decline is the outlook for slower U.S. growth, which makes the dollar a less attractive investment.

But fears that the dollar's level is unsustainable because of the heavy indebtedness of the United States to other countries is also behind the weakness this year, analysts said.

The shift to euros underscores its growing role as a reserve currency nearly eight years after its establishment. Central banks often keep the details about their currency holdings a secret.

The move by the U.A.E. central bank "is hard evidence that diversification is happening," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "This is negative for the dollar in a broad sense as it reflects falling confidence in the currency."

Central banks in Russia, Switzerland and New Zealand are also diversifying away from the dollar and into yen after the Japanese currency reached a 10- month low against its biggest trading partners in October.

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 bank reserves represent a fraction of the currency holdings of state-owned investment firms like the Abu Dhabi Investment Authority, which is estimated to have more than $500 billion under management.

But the signal that such a move sends to financial markets is a negative one.

"It is a recognition of the vulnerability of the dollar over the coming year," Simon Williams, an economist with HSBC Holdings, said by phone from Dubai.

The euro rose to $1.3123 from $1.3098 after Suwaidi's comments were published Wednesday.

"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. Oil producers in the Middle East and Central Asia will run a surplus of $322 billion for all of 2006, according to the International Monetary Fund.

Total foreign holdings of U.S. Treasury securities — which generally support the dollar — increased to a record $2.16 trillion in September, just under half of the $4.34 trillion outstanding.