- Blog Post
- Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.
The prolific Steve Johnson in the Financial Times:
Middle Eastern oil exporters have rediscovered their love of the US dollar in the past year, helping fuel the currency's rally to two-year highs against the euro, yen and sterling. The position marks a sharp turnround from the third quarter of 2004, when the proportion of bank deposits held in dollars by members of the Organisation of the Petroleum Exporting Countries slumped to a record low.
By the middle of this year, the proportion of Opec deposits held in dollars had rebounded from 61.5 per cent to 69.5 per cent, with the share held in euros falling from a high of 24 per cent to 16 per cent, according to figures released today by the Bank for International Settlements.
BIS attributes the sharp rise in the proportion of dollar deposits to the stabilisation of the dollar and the 300-basis point rise in US interest rates since June 2003, which has lifted the return on US deposits. In contrast, the European Central Bank only initiated its first rate rise of the cycle last week.
Alas, I did not see a link to the latest BIS quarterly on the BIS web page.
Big buyers of dollars this year include the People's Bank of China, Japanese private investors (unhedged), OPEC sheiks and one assumes, given its oil, Russians in various guises. No surprise, I tend to share the concerns about OPEC's long-term commitment to financing the US expressed by Lex and Citi's Marvin Barth:
Meanwhile Marvin Barth, currency economist at Citigroup, reported anecdotal evidence of strong Opec buying of Japanese and European equities. However, he argued that high oil prices would ultimately weaken the dollar by redirecting global savings from Asian countries such as China and Japan, which keep the bulk of their reserves in dollars for use in currency intervention, to the oil exporters which, even now, are not as dollar-focused. Moreover, if interest rate differentials are key to Opec behaviour, the start of the eurozone tightening cycle could end the dollar's newfound popularity.
I continue to believe that one shouldn't count on China financing forever either, as I don't think the PBoC really wants to double its current dollar holdings (which, including the $60 billion transferred to the state banks, could well approach $700 billion toward the end of this year) over the next few years. But then again, the PBoC doesn't make Chinese exchange rate policy, the state council does.