UAE trading dollars for euros

By Min Zeng and Annie Pinkert
Bloomberg News Service
Wednesday, December 27, 2006

http://www.bloomberg.com/apps/news?pid=20601087&sid=acjLrGsR2NOY&refer=home

The dollar dropped the most in more than a week against the euro after the head of the United Arab Emirates central bank said it will convert some of its reserves of U.S. assets into the European currency.

The U.A.E. is among oil exporters including Iran, Venezuela and Indonesia that are looking to shift their currency reserves into euros or price the commodity in the 12-nation currency. The dollar pared some of its losses after government data showed sales of new homes rose more than economists forecast last month.

"The report is hard evidence that diversification is happening," said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. "This is negative for the dollar in a broad sense as it reflects falling confidence in the currency."

The dollar fell to $1.3127 per euro at 1:33 p.m. in New York from $1.3098 yesterday. The U.S. currency also declined to 118.72 yen from 119.15. The euro traded at 155.85 yen, from 156.04, after touching a record 156.43 on Dec. 21. The dollar has declined 9.7 percent versus the euro this year and risen 0.8 percent against the yen.

The U.A.E. will switch 8 percent of its foreign-exchange reserves from dollars into euros before September, U.A.E. Central Bank Governor Sultan Bin Nasser al-Suwaidi said during a Dec. 24 interview in Abu Dhabi. The U.A.E. has started "in a limited way" to sell part of its dollar reserves, he said.

The total value of the U.A.E.'s current reserves is $24.9 billion, 98 percent in dollars and 2 percent in euros, al-Suwaidi said.

The share of foreign-exchange deposits held in dollars by OPEC oil producers, including Saudi Arabia and the U.A.E., fell to a two-year low of 65 percent during the second quarter, from 67 percent in the first quarter, Bank for International Settlements figures released earlier this month show.

China slowed purchases of Treasuries in the last two years even as its foreign exchange reserves surpassed $1 trillion, the largest in the world. Central banks in Russia, Switzerland and New Zealand are diversifying away from the dollar and into yen after the Japanese currency reached a 10-month low against its biggest trading partners in October.

"It's the first time we've actually seen some numbers behind" their statements, said C.J. Gavsie, vice president of North American foreign exchange sales at BMO Capital Markets in Toronto. "It's adding force to dollar weakness going forward."

The dollar pared some of its losses after a government report showed sales of new homes rose to an annual rate of 1.047 million last month from a revised 1.013 million in October. It compared with the median forecast of 1.018 million in a Bloomberg survey.

"The housing market stopped deteriorating," said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million worth of funds under management. "The report points to some resilience in the housing sector. I am in the dollar bull camp."

The Fed has left borrowing costs at 5.25 percent for the past four policy meetings, after a two-year cycle of rate increases. The European Central Bank has raised rates six times in a year, to 3.5 percent. The Bank of Japan lifted its benchmark in July for the first time in almost six years, to 0.25 percent.

Interest-rate futures show traders see a 23 percent chance the Fed will lower its overnight target lending rate between banks by a quarter-percentage point to 5 percent in March, down from a 28 percent likelihood before the report. The odds are up from 11 percent on Dec. 14.

The yen also gained against the dollar and the euro after a Jiji Press report suggested the BOJ will push rates higher at its January meeting because of better-than-expected data yesterday.

"The Jiji report is spurring yen buying," said Nobuo Ibaraki, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. "Expectations for an interest-rate hike had receded. So the Jiji report will have a big impact on the yen." Japan's currency may strengthen to 118 per dollar today, he said.

Jiji correctly predicted 10 days before the BOJ's meeting last week that policy makers would keep rates unchanged. The central bank will consider lifting the benchmark to 0.5 percent from 0.25 percent when it announces its next decision on Jan. 18, Jiji Press reported, citing unnamed sources.

Slovakia's koruna is the world's top-performing currency this year, rising 22 percent against the dollar. Iceland's krona is the biggest loser, dropping about 12 percent.

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