Commodities will move out of pricing in dollars, fund manager says

By Pratima Desai
Reuters
Friday, October 12, 2007

http://www.reuters.com/article/reutersEdge/idUSL1227332920071012

LONDON -- Resource-rich countries will move away from the dollar as a base for the commodities they produce to protect their earnings as the dollar's slide accelerates, UK-based Emergent Asset Management told Reuters.

The debate about commodity denomination has heated up over the past few months because the dollar has come under persistent selling pressure as markets started to price in economic slowdown and falling interest rates in the United States.

David Murrin, chief investment officer at Emergent, thinks the chances of a redenomination are high, but that it could take some time.

"I can see countries like Russia trying to price commodities in some other currency, possibly roubles," he said. "Keep your eyes open for when and how rebasing starts to creep in."

The move away from dollars has already started in Iran, which said this month that about 85 percent of its oil exports were being sold in non-U.S. dollar currencies.

Many other commodity producing countries have or are talking about diversifying their reserves away from the dollar.

The U.S. Federal Reserve in September slashed benchmark interest rates by half a percentage point to 4.75 percent, narrowing the interest rate differential against other currencies and prompting heavy sales of dollars and related assets.

Growing speculation that the U.S. central bank will have to cut rates again, at least once more before the end of this year, to stave off economic slowdown, sparked a fresh bout of dollar sales this week.

...Open door

"The potential for the dollar's downtrend to pick up speed is high and that's what they (the U.S.) want," Murrin said.

"They've opened the door to a lower dollar simply because it's their job to keep up the illusion that asset prices in the United States are high. ... That makes their debt-to-equity ratios look interesting."

The problem for the United States for many years has been its current account deficit at around 5.5 percent of gross domestic product. Overseas investors have financed it by buying U.S. assets such as stocks and bonds.

But if investors started to believe that U.S. assets were overpriced, then confidence could quickly disappear and leave the United States on the verge on bankruptcy, Murrin said.

"A way to stimulate your economy is to let the currency go," he said, adding that this ploy could be dangerous as it could further fuel inflation in an environment of rising commodity prices.

Murrin thinks the commodity bull run could continue for another "20 years at least."

"What I think is alarming is that we're behaving as if we're at the end of the cycle," he said.

"There are too many people and too few resources, there are too many of us fighting over the same resources. ... We're facing a huge global crunch in terms of natural resources."

In previous times countries have gone to war over natural resources. This time, so far, there are no guns or tanks.

The ammunition is money accumulated by resource-rich countries like China and Russia over the past few years.

"Now there are few places to expand," Murrin said. "China has gone into Africa. You could go to Antarctica."

This year Russia planted a national flag in the Arctic, home vast untapped gas and oil reserves.

Emergent Asset Management does not disclose it assets under management or returns.

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