Oil producers shun dollar

FT ^ | December 10, 2006 | Haig Simonian, Javier Blas, Carola Hoyos

[GodGunsGuts]

Oil producers shun dollar

By Haig Simonian in Zurich and Javier Blas and Carola Hoyos in London

Published: December 10 2006

Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.

Market liquidity is traditionally low in December, and many traders have locked in profits, potentially reinforcing volatility.

Russia and the members of the Organisation of the Petroleum Exporting Countries, the oil cartel, cut their dollar holdings from 67 per cent in the first quarter to 65 per cent in the second.

Meanwhile, they increased their holdings of euros from 20 to 22 per cent, the BIS said. The speed of the shift may help to explain the weakness of the dollar, which recently fell to a 20-month low against the euro and a 14-year low against sterling.

The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”

The review shows that Qatar and Iran, whose foreign exchange policy has sparked widespread market speculation, cut their dollar holdings by $2.4bn and $4bn respectively.

Such shifts may be modest compared with the total assets held, but they provide a crucial indication on future thinking.

Currency switches are likely to be progressive, subtle and discreet, as untoward attention could hit the dollar, lowering the value of depositors’ remaining dollar-denominated assets.

The last time oil-exporting countries cut their exposure to the dollar – in late 2003 – it pushed the euro to an all-time high against the dollar. Eighteen months ago, the exposure to the dollar of oil producing countries was above 70 per cent.

BIS data is the best guide financial markets have to the currency investment trends of oil producers, which otherwise do not provide figures. The rise in oil prices since 2002 means oil producing countries have amassed a current account surplus of about $500bn, according to the IMF. This is 2½ times the current account surplus of China.

Overall, Opec’s dollar deposits fell by $5.3bn, while euro and yen-denominated deposits rose $2.8bn and $3.8bn, respectively. Placements of dollars by Russians rose by $5bn, but most of their $16bn additional deposits were denominated in euros.

The dollar has suffered weakness because of concerns about global imbalances and the future course of the Federal Reserve’s interest rate policy.

Additional reporting by Peter Garnham in London

[Toddsterpatriot]

I wouldn't be surprised to see a few countries opt out of the Euro in the next decade or so.

Italy won't last a decade.

[prov1813man]

Well, the thing is, all those dollars going overseas has kept inflation low, and rates down, if this reverses, think Jimmy Carter.

To me, that's bad.

[GodGunsGuts]

It is bad. But losing the privilege and stabilizing influence of the USD as the world's reserve currency is far worse. We need to make massive cuts in spending and stop doing business with our enemy, Communist China!

[Toddsterpatriot]

All I hear on FR is whining about cheap foreign goods. You mean expensive foreign goods are worse?

[Enchante]

I prefer the original version:

"God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference."

[GodGunsGuts]

Monty Guild (one of my favorite investment gurus) agrees:

http://www.financialsense.com/editorials/guild/2006/1208.html

[prov1813man]

No, I mean (and believe me I am often wrong) inflation hits our domestic economy cause rates go up (Carter 20%), housing crashes, gas is $5 a gallon, etc

I am not a doom and gloomer by any means, but you asked what was bad about dropping dollar value and i am just pointing out some things that come to mind.

Generally, we are resourceful and find a way out of these things, but they do happen from time to time and the upcoming band of traitors are inherently bad for us, so will probably screw up money almost right away.

[kinoxi]

The problem is, by shifting our debt burden to the world, we are screwing our trading partners and threatening the status of the USD as the world's reserve currency. We receive innumerable benefits from this privilege. And if the world turns its back on the greenback, they will have no choice but to dump their worthless dollars into US assets, which will cause domestic prices to skyrocket.

It could be argued that they initially shifted their debt burden to us and this is a naturally occurring 'balance' being found. The chicoms (Yuan) have been intentionally undervaluing their currency (shifting the debt burden to the US) for instance. The EU is digging a financial disaster for itself due to socialist policies and thus cannot in the short term replace the dollar. I don't see this situation as critical yet.

[FreedomCalls]

Because then people have to spend more on essential items and have less for disposable income which causes companies specializing in such items to go out of business which then causes people to lose their jobs.

[oceanview]

the bottom line here is - China must be broken, their peg must be broken, it is the reason why the currency market cannot reach a natural equilibrium. this is why you see such an unprecendented high level delegation going to china.

[kinoxi]

I agree. Their refusal to allow natural currency valuations is ridiculous and destructive, not to mention dangerous.

[GodGunsGuts]

Greenspan is telegraphing a major fall in the USD. He is even warning us what to do about it:

Greenspan says expects more dollar weakness Mon Dec 11, 1:02 PM ET



Former U.S. Federal Reserve Chairman Alan Greenspan said on Monday he expected the dollar to stay weak for the next few years and will continue to drift down, weighed by the U.S. balance of payments deficit.

"I expect that the dollar will continue to drift downwards until there will be a change in the U.S. balance of payments," Greenspan told a business conference here via video-link from the United States.

"There has been some evidence that OPEC nations are beginning to switch their reserves out of dollars and into euro and yen," Greenspan said.

"It is imprudent to hold everything in one currency," he said, adding that at some point the dollar will be moving lower.

"That will be the experience of the next few years," Greenspan said.

Greenspan said markets were so sophisticated it was very difficult to forecast the short term direction of the dollar.

http://news.yahoo.com/s/nm/20061211/bs_nm/usa_greenspan_dc_1

[Toddsterpatriot]

and will continue to drift down, weighed by the U.S. balance of payments deficit.

Really? There is a balance of payments deficit?

I don't think that Greenspan said that. I think the reporter went to the same school as the guy would insists on counting the "triple deficits".

[Toddsterpatriot]

No, I mean (and believe me I am often wrong) inflation hits our domestic economy cause rates go up (Carter 20%), housing crashes

Actually, if inflation hits 20%, hard assets, like housing, would go up.

I was kidding about the dollar. I'm tired of the clowns who say cheap goods are bad. Tell the people who need to save money for their kids college education that they need to pay higher prices.

[GodGunsGuts]

Apparently, everybody heard the same thing (except you...as usual):

GLOBAL MARKETS-Greenspan rattles dollar, but Asia shares up

"I expect that the dollar will continue to drift downwards until there will be a change in the U.S. balance of payments," he said...

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=81f697c6-7a8d-4eb8-be3d-96764de5739f

[Toddsterpatriot]

Apparently, everybody heard the same thing (except you...as usual):

Everybody heard that there is a balance of payments deficit? Then everyone who heard that is stupid, as usual.

until there will be a change in the U.S. balance of payments

Is the balance going to go from a deficit to a surplus? LOL!

[GodGunsGuts]

Dollar Little Changed After Greenspan Expects Further Decline

By Min Zeng

Dec. 12 (Bloomberg) -- The dollar was little change against the yen, after falling from a two-week high yesterday when former Federal Reserve Chairman Alan Greenspan said the U.S. currency will keep dropping until the current-account deficit shrinks.

http://www.bloomberg.com/apps/news?pid=20601101&sid=aTMNnHEXciZ8

[GodGunsGuts]

Greenspan's predictions cause dollar to fall

December 11, 2006 18:50
The dollar fell against the euro today after former US Federal Reserve Chairman Alan Greenspan warned that he expected a few years of greenback weakness, causing US stocks to give up some gains.

Greenspan said it would be 'imprudent to hold everything in one currency'. He added that he expects the dollar to continue to drift down, weighed by the US balance of payments deficit...

http://www.rte.ie/business/2006/1211/dollar.html

[GodGunsGuts]

CURRENCIES

Dollar mixed ahead of Fed meeting

Yen hits record low vs. euro on diminishing rate-hike hope
By Wanfeng Zhou, MarketWatch
Last Update: 4:27 PM ET Dec 11, 2006


NEW YORK (MarketWatch) -- The dollar fell against the euro Monday after former Federal Reserve chief Alan Greenspan warned that he expects the dollar to be weak for a few years to come.

Earlier the U.S. currency had made gains on speculation that the Fed, which is due to meet on Tuesday, will refrain from signaling that a rate cut is in the cards for early 2007. Speaking via remote connection to a conference in Tel Aviv, Greenspan said that the dollar will keep falling until the U.S. current account deficit narrows and that it would be imprudent to "hold everything in one currency." ...

http://www.marketwatch.com/news/story/story.aspx?guid=%7B1FB37FF2%2D7F38%2D458A%2D8444%2D04145E575C1A%7D&dist=rss&print=true&dist=printTop

[Toddsterpatriot]

Yes, I get it, the dollar could rise, the dollar could fall, that doesn't change the utter stupidity of saying there is a balance of payments deficit. By definition, the balance of payments is balanced.

How many times do I have to repeat it before you understand? Is it going to take 3 months, like it did for you to realize that "triple deficits" double counted the trade deficit, which made "triple deficits" so inaccurate as to be useless.