DUBAI: The prospect of Middle Eastern oil exporters shunning the dollar sent ripples through currency markets yesterday, but analysts said any shift looks set to be gradual, marginal and driven by economic considerations.
Concern about investment flows to the US from the world’s biggest oil exporting region rose last week after a US political storm over security risks forced Gulf Arab firm Dubai Ports to relinquish control of six US ports.
The central bank governor of the United Arab Emirates then announced on Sunday that he was looking to convert up to 10% of its foreign exchange reserves from dollars into euros - double the target the bank had previously set.
The news helped lift the euro to a one-month high versus the yen and a one-week high against the dollar. Traders said sentiment had been affected by concerns that protectionism would hamper foreign investment in the US.
Governor Sultan Nasser al-Suweidi said the Dubai Ports furore will colour foreign investors’ perception of the US and affect future investment decisions, but he made no link between the row and his plans for the reserve portfolio.
Instead he talked about the relative appeal of the euro. Analysts said it would be economic considerations rather than politics that would drive decision making by state-linked investors who control the bulk of the Gulf’s petrodollar flows.
“I strongly doubt that this will be the beginning of wholesale diversification from US dollars,” said Stephen Jen of Morgan Stanley in London.
The Bank for International Settlements says investors from Opec member states have become increasingly sensitive to changes in interest rate differential between the euro and the dollar.
According to its data, the BIS said Opec deposits favoured the euro over the dollar from early 1999 to early 2004 based on interest rate differentials tilted toward the euro and the depreciation of the dollar.
But the trend reversed in 2004 and 2005 as the exchange rate stabilised and rates began rising in the US, leading to an 8 percentage point decline in the euro’s share.
Now that could change again with the US Federal Reserve believed to be close to the peak of its rate raising cycle and the European Central Bank having just embarked on policy tightening.
Ali al-Shihabi, chief executive of Dubai-based Rasmala Investments, said the ports row would hit high profile investments in the US, especially mergers and acquisitions, but not affect portfolio investments.
“Portfolio investments in financial markets will continue, however, since the breadth and depth of US markets is unsurpassed and these investments do not attract public interest,” Shihabi said.
Other analysts say the oil exporters are too closely wedded to the dollar to dump it wholesale. Oil exports are denominated in dollars and the UAE, like the five other Gulf Arab states, has a currency pegged to the dollar.
During the euro’s long rise against the dollar before last year Gulf governments came under pressure to adopt a basket of currencies from Gulf residents concerned about the cost of euro-denominated imports. The pressure came to nothing.
“The oil exporting countries are naturally US dollar centric. Even if they want to diversify away from US dollars there is a strict limitation as to how much they can do this,” said Jen.
However Iran, a major Opec exporter, gave dollar watchers another reason to watch the region’s politics by saying it could switch its holdings into other currencies to avoid restrictions imposed by some financial institutions.
Iran caused a flap on international markets earlier this year after the central bank governor was quoted saying Tehran was repatriating dollars held in foreign accounts as pressure mounted on Iran’s nuclear programme. However, the remarks were swiftly retracted. – Reuters