Arab Central Banks Deal The Dollar Another Blow

Tuesday, March 14, 2006

Like it or not but the Arabs have dealt another blow to the US dollar, benefitting the Euro which is again trading above $1.20. According to a story in the Independent the United Arab Emirates announced that they would switch 10% of their dollar holdings into Euros. Although the transaction volume of $2.3 billion looks tiny in comparison to daily forex turnover in excess of $1 trillion it is another country abandoning its effective dollar peg. This comes after Syria has decided to switch to the European curency for external transactions. I begin to take bets that the dollar has seen its biggest share in forex reserves by now. Currently more than 50 countries tie their currency to the Euro.
From The Independent:
Middle Eastern anger over the decision by the US to block a Dubai company from buying five of its ports hit the dollar yesterday as a number of central banks said they were considering switching reserves into euros.
The United Arab Emirates, which includes Dubai, said it was looking to move one-tenth of its dollar reserves into euros, while the governor of the Saudi Arabian central bank condemned the US move as "discrimination."
Separately, Syria responded to US sanctions against two of its banks by confirming plans to use euros instead of dollars for its external transactions.
The remarks combined to knock the dollar, which fell against the euro, pound and yen yesterday as analysts warned other central banks might follow suit.
Last week the US caused dismay after political opposition to the takeover of P&O by Dubai Ports World forced DPW to agree to transfer P&O's US port management business to a "US entity."
The governor of the UAE central bank, Sultan Nasser al-Suweidi, said the bank was looking to convert 10 per cent of its reserves, which stand at $23billion, from dollars to euros. "They are contravening their own principles," he said. "Investors are going to take this into consideration [and] will look at investment opportunities through new binoculars."
Looking at today's record US current account deficit figures it may not be such a bad idea to look for a dollar exit; before everybody else starts looking.

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