from Follow the Money

Worth watching (UAE reserve diversification)

March 13, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Up til now, the UAE's reserves were almost entirely in dollars.  Maybe not for much longer

The euro hit a one month high on Monday against the yen and its best in a week versus the dollar after the central bank of the United Arab Emirates said it was considering increasing its euro denominated reserves. The bank said on Sunday it was looking to switch 10 per cent of its reserves from dollars into euros. The reserves were estimated at $23bn in December and are almost entirely in dollars. 

Of course, $23 billion in reserves is chump change.  The big money is the UAE is found in the various investment authorities of the various emirates, not in the central.  The big central bank caches of oil dollars are found in Saudi Arabia and Russia.

But there is little doubt that a surge in dollar accumulation by dollar peggers in the Gulf provided a lot of support for the dollar - and a lot of financing for the US - in 2005.   

Of course, it not entirely obvious to me that the Gulf countries can really shift massively out of dollars (a 10% shift of the emirates' $23 billion in reserves is a bit over $2 billion - not a massive shift in my book) without driving the dollar down.  

And remember, they still peg to the dollar, so they would be driving their own currencies down - something that hardly makes sense in the face of record oil revenues.

Incidentally, I wonder if the UAE's role in incipient US plans to try to separate the Iranian people from the Iranian regime played some role in the Bush Administration's initial treat to veto any congressional attempt to block the DPW deal.  Tis clear that the Administration views Dubai as an extremely critical ally -- the new Saudi Arabia, so to speak.  

Undersecretary of State R. Nicholas Burns said in an interview that the department will also add staff in Dubai, which is part of the United Arab Emirates, as well as at other embassies in the vicinity of Iran, all assigned to watch Tehran. He called the new Dubai outpost the "21st century equivalent" of the Riga station in Latvia that monitored the Soviet Union in the 1930s when the United States had no embassy in Moscow.

And Dubai's own gameplan is rather interesting.  Hasn't Dubai also long been a center for evading the various sanctions the US places on Iran?

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