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UAE turns
back on dollar in foreign reserves
shake-up
By Ambrose Evans-Pritchard (Filed: 14/03/2006) The United Arab Emirates is planning to switch 10pc of its foreign reserves from dollars to euros in the first sign of fall-out from Washington's snub to Dubai Ports World last week. Sultan bin Nasser Al Suwaidi, the governor of UAE's central bank, said the plan was designed to achieve a better balance in the $19.1bn reserves of the oil-rich Gulf federation, almost entirely held in dollars. "This policy initiative has nothing to do with the controversy over DP World's bid for P&O operations in the US," he said. In the same breath, however, he denounced the move by the US Congress to block the Dubai group from taking control of six American ports on security grounds, warning it would drive capital away. "It is against the principles of international trade. People will look at investment opportunities in the US through new binoculars," he said. The UAE has been a close ally of Washington in the fight against terrorism, so the shrill tone on Capitol Hill - bordering on anti-Arab hysteria - has been deeply wounding. There are fears it could lead to a withdrawal of petrodollar funds from the US, much like the Saudi-driven capital flight after the terrorist attacks of 9/11. "Dubai's difficulties are going to cause Arab countries to invest less in the United States," said Mohab Kamel, a trader at Kara Energy in Geneva. "The kick in the teeth by Washington is not reassuring for Kuwait and Saudi Arabia, which have a more fundamentalist attitude," he said. The next move could be a decision by Emirates Airlines - the region's top carrier - to opt for Europe's Airbus A350 in a $7.5bn order for passenger jets expected next month instead of Boeing's 787 Dreamliner. The IMF forecasts that the Gulf region will rack up a current account surplus of $275bn in 2006, giving it huge clout in the global capital markets. By some estimates, the recycling of petrodollars has eclipsed the Asian central banks as the chief source of foreign financing for the US deficit, now over 7pc of GDP. Exact figures are elusive as Middle East holdings of US Treasury bonds are mostly disguised through purchases in London and the Caribbean. David Lubin, an economist at HSBC and author of a report on Gulf petrodollars, said Washington could prove to be the victim of its recourse to "asset protectionism". "It has been a particularly unpleasant incident and it may well have longer-term consequences since the US relies on foreign inflows to fund its current account deficit. This sort of move will make it even more dependent on easily-reversible portfolio flows," he said. The IMF's Middle East director, Mohsin Khan, said that central banks in the Gulf region play a secondary role in recycling petrodollars. What really matters is the investment strategy of the giant oil funds, such as the secretive Abu Dhabi Investment Trust now worth well over $200bn. "They are still going into US-denominated assets, and the proportion of the assets held in dollars is not changing much - Gulf investors are not dumping dollars," he told the Middle East Economic Digest. The moment they do, however, the long-awaited slide in the US dollar could start with a vengeance. Complete archives at http://www.sitbot.net/ Please let us stay on topic and be civil. OM
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