Falling U.S. dollar pushes Emirates to convert reserves to stronger euro

The wilting U.S. dollar is pushing the United Arab Emirates, a close U.S. ally, to convert 8 percent of its foreign exchange reserves into the healthier euros, the central bank governor said on Thursday.

The Emirates' nearly US$25 billion (euro18.9 billion) currency reserves are currently 98 percent dollars. That percentage will drop to 90 percent in six to nine months if the bank's directors approve the switch as is expected, Central Bank governor Sultan Bin Nasser al-Suwaidi said.

The sale itself is a small one, worth about US$2 billion (euro1.5 billion). But the implications of a cash-rich friend of Washington selling off its dollars is a sign that central banks elsewhere may be looking to cut losses from a dollar widely expected to slip further in 2007.

"It's a prudent move and it's indicative of broader thinking," said Simon Williams, HSBC's chief Middle East economist. "It's another factor that will exert downward pressure on the dollar."

The dollar fell to US$1.3132 euro in European trading on Thursday, compared with US$1.3123 in New York on Wednesday.

A bigger worry for the U.S. Federal Reserve Bank is that the six energy-rich Gulf Arab countries may consider converting dollar holdings in their far larger government investment funds, which Williams said keep more than US$1 trillion (euro760 billion) under management. Gulf governments typically do not release the compositions of those funds.

"If they're moving those assets out of the dollar on the same scale, that's a much bigger deal," Williams said.

The six Gulf Cooperation Council countries the Emirates, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman enjoy a collective current account surplus of around US$220 billion (euro167 billion) this year, which must be invested in foreign assets.

With a faltering dollar, Williams said a smaller amount of that energy surplus will flow into U.S. assets.

"A good chunk of that will still flow toward the U.S., but less than in the past," he said. "The Fed will be watching this very closely."

Other countries, including Russia, Venezuela, Indonesia and Iran also have decided to cut their dollar reserves or, in Iran's case, start pricing oil in the European currency.

During OPEC's Nigeria summit this month, OPEC President Edmund Daukoru said the organization was "not rushing into other currencies." But since global oil purchases are made in dollars, the shrinking dollar slashes the purchasing power of oil exporters, reports AP.

The Emirates decision to sell off its dollar holdings comes against a backdrop of strain in its normally warm relations with Washington.

Many here were upset earlier this year when the U.S. Congress blocked the sale of U.S. port operations to Dubai-based DP World a move that officials here said smacked of anti-Arab bias. Since then, talks on a free trade pact between the Emirates and Washington have also faltered.

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