The Dwinding Dollar: Part 1

UAE considers cut in dollar reserves

By Peter Garnham
The United Arab Emirates, the second-largest Arab economy, signalled on Monday that it might cut its holdings of dollars by almost half, highlighting a recent trend of reserve diversification away from the US currency.

Sultan bin Nasser al-Suwaidi, the governor of the central bank of the United Arab Emirates, told a meeting of central bankers from Gulf states in Abu Dhabi that the bank wanted eventually to lower the dollar's share of its foreign currency reserves to a range of 50-90 per cent. Currently the UAE holds 98 per cent of its $25bn foreign exchange reserves in dollars and 2 per cent in euros.

"It is our investment policy to diversify," said Mr al-Suwaidi. "We are still waiting for the appropriate time."

Mr al-Suwaidi said that the central bank was still planning to convert as much as8 per cent of its dollar holdings into euros – a scheme it first proposed in March amid fears that the US currency was set to depreciate.

Mr al-Suwaidi added that the UAE was considering taking holdings in sterling and yen.

Analysts said that although the UAE had made similar comments on reserve diversification on more than two occasions this year, Monday was the first time the UAE had said that dollar reserves could be reduced to as low as 50 per cent.

Ashraf Laidi, chief foreign exchange analysts at CMC markets, said the importance of Mr al-Suwaidi's comments were underlined by the fact that they came just two days after the Swiss National Bank revealed that it had added yen to its $36bn in foreign exchange reserves and trimmed the share of dollars while raising allocation to other currencies.

Mr Laidi said that with the Federal Reserve expected to have concluded its interest rate raising campaign and data revealing last Friday that US growth had slowed to its lowest level in three years, world central banks were fulfilling their profit-maximising functions by attempting to sell a portion of their dollar reserves.

In July, Mr al-Suwaidi said that the UAE was investing in short-term debt instruments in the US because he expected US interest rates to rise.

"Those comments were made last summer when the Fed was expected to raise rates and the US currency stood on a healthier footing," said Mr Laidi. "With these conditions reversing, global central banks will find these trends to be the vital catalysts for diversification."

Original article posted here.