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Home Front Economy
Arab central banks move assets out of dollar
2006-03-14
Headline slightly misleading, in my uninformed opinion the Arabs are floating a trial balloon to see how the markets react. They prolly don't want to lose *too* much money.
Middle Eastern anger over the decision by the US to block a Dubai company from buying five of its ports hit the dollar yesterday as a number of central banks said they were considering switching reserves into euros. The United Arab Emirates, which includes Dubai, said it was looking to move one-tenth of its dollar reserves into euros, while the governor of the Saudi Arabian central bank condemned the US move as "discrimination".

Separately, Syria responded to US sanctions against two of its banks by confirming plans to use euros instead of dollars for its external transactions. Syria has switched the state's foreign currency transactions to euros from dollars, the head of the state-owned Commercial Bank of Syria, Duraid Durgham, said.

The remarks combined to knock the dollar, which fell against the euro, pound and yen yesterday as analysts warned other central banks might follow suit. The euro rose a quarter of one percentage point against the dollar to a one-week high of $1.1945, although it retreated in later trading.
I'm not an econ expert; I'd appreciate some informed commentary in the comments.
Posted by:Seafarious

#14  Actually, cutting the money supply leads to deflation according to my text books.

Current account is one of those bugbears that the press uses to scare us. You really need to look at the total account. In 2005 it was
Current Account: -$668B
Captital Account: -$5.6B
Financial Account: +$801B
Account surplus: +$127B

There was also a "statistical discrepancy" of $9.6B. This is down considerably from previous years. The statistical discrepancy is believed to reflect drug transactions, money laundering, hawala banking, terror financing, etc. The drastic drop in the statistical discrepancy may indicate that we are actually winning on this front of the war. It's too early to know for sure though.

Without boring everyone here, what this all means is that a lot of foreign countries are underpricing their currency to create manufacturing jobs for their own. Then since their productivity sucks and therefore their jerry-rigged industries are crappy investments, they take their money and invest it right back into the USA. (I'm ignoring rule of law, property rights and transparency issues here for the sake of brevity.)

I'm not saying that this is real healthy for the US long term, but this is why our economy never collapses despite the on-going doom-saying beginning with the petrodollar and Eurodollar "crisis" of the 70's.
Posted by: 11A5S   2006-03-14 18:26  

#13  Hmmm, maybe we can use this to lower corp taxes to make it more attractive here.
Posted by: anonymous2u   2006-03-14 12:50  

#12  A real worry here is that this will give impetus to other [real] governments, with assests and tangibles beyond some oil monies, to switch to Euro as well. We could see the doomsday prediction of dollar crash big time, etc.

However, there is one thing backing the dollar that no other currency has going for it ... the United States military. When push comes to shove, it doesn't matter how many meetings and guests you put up at 5 star hotels, it matters how many 5 star hotels you can raze!

Everyone in the world knows, be it concious or sub-concious, that if anything really big goes down, the US will have to solve it. Along for the ride comes the security of our currency.

Further, Eurozone is terrified, absolutley terrified of an even weaker dollor because of the exchange. The companies in our industry, based in the US that sell to Eurozone would be fine with a bit or moderate decrease in dollar.

Now, what we really need, is global supply of Aluminum, Titanium, etc to open up and cheapen up - spot buying at 40 - 50% increased rates is killing us (and everyone else).
Posted by: bombay   2006-03-14 08:09  

#11  This is real bad. The ports deal may have more drastic repercussions than expected if this turns from threat to reality.

Uh-huh.

The US refused to let a jihad-financing government invest in US port operations, so they throw even more tantrums in the Middle East. Meanwhile, their Friday prayers are chock-full of calls for our deaths, enslavement, etc. and we don't do anything about it.

the governor of the Saudi Arabian central bank condemned the US move as "discrimination"

How many Bibles in Saudi Arabia? Churches? How many Jews?

Is it possible for someone with an Israeli stamp on their passport to get into Saudi Arabia?

What's being said about the US, England, Australia, India, and Israel in Saudi's government-funded mosques?
Posted by: Robert Crawford   2006-03-14 07:25  

#10  And we will remove their sovereignty from the oil patches.
Posted by: Listen To Dogs   2006-03-14 03:21  

#9  I think they just got really excited about the "porn" euros and wanted a few of 'em. Especially the 600 euro note.
Posted by: Desert Blondie   2006-03-14 01:43  

#8  There are two separate issues here. One is the currency you trade in and the other is the currency of foreign assets you hold.

The first has a minor impact on the demand for a particular currency. Its easy to explain why. I sell a product for USD. You say I want to pay in Euros. I say fine. You pay me. Ten minutes later I convert the Euros to USD. Net effect zero.

The second has a much greater effect on the demand for a currency, but as someone mentioned, results in liquidity issues and other effects that tend to reduce the effect of selling USD assets.
Posted by: phil_b   2006-03-14 01:38  

#7  10% of $23 billion is ??? peanuts
Posted by: Rafael   2006-03-14 01:06  

#6  The move by these banks will have very little effect on the $US.
There are two issues.
First is seignorage. If you go to this location, you will see that US monetary base (ie currency on issue) as at 15 February 2006 is worth US$795,304,000,000.
Assume a nominal interest rate of 5% then we get seignorage of about $40 billion.
A lot of this seignorage will come from the people of the USA so the amount coming from the rest of the world will be a lesser figure, generally around 15-25%
So you are looking at between 6 and 10 billion, which is certainly not the source of US hegemony, as the conspiratorists like to claim.
On the downside for the Arab banks is the fact that they are making it harder for their trade partners to do business with them by demanding that they use a less liquid currency.
Posted by: tipper   2006-03-14 01:03  

#5  This is real bad. The ports deal may have more drastic repercussions than expected if this turns from threat to reality.

The Arabs have a conspiracy that Iraq was invaded in part because they ripped their currency off the dollar and refused to sell oil in dollars anymore. Iran has already said they are going to shift from dollars I believe in their new year and Syria has hinted to such.

The idea is this, the oil being based on the dollar means that if oil gets to expensive the US gov can build up debt then just print out dollars basically reducing the price actually paid. Since the US in the only one to print dollars it gives the US control to a point.

Iran and crew want to end this scenario not that it will help them so much the EU will be as bad or worse than the US, but it will hurt the US because then if the US prints money it will just take more dollars to buy the same EU dollars worth of oil.

This goes with the Arab gold coin idea were you would then have an Arab controlled currency fix and they would have full control.

I am actually surprised by UAE I understand their anger but I am sure they must understand they will get taken care of later on with some payback. They of all people must realize that at this point in history its tread light on America I mean we are at War. Hell any foreign control of our ports right now is bound to get a reaction Arab or not.

I seriously doubt this will pan out to anything real thou, just sounds like a show me the money ploy.

I am not a economics expert just relaying what I have heard and read with some basic economic knowledge.
Posted by: C-Low   2006-03-14 01:02  

#4  Short term, look for oil prices to rise, and the euro to go up vs the dollar as other players hedge their bets. (Notice these are only plans at this time, they haven't actually done it yet.) Should they follow through, expect a rise in inflation and lending rates here in the US as the money supply tightens a bit.

So, great for the Europeans, right? Not exactly. Their goods become even more expensive vs the dollar. I guarantee Airbus ain't gonna like that, nor will any other European industries that compete directly with us. Fewer American tourist dollars won't make them smile, either.

The real test is whether they do it, and how long they hold onto the euros in the first place. They have had plenty of opportunity in the past to do exactly this and haven't followed through.

Look at it this way. I would be more concerned regarding our economy if they had already accumulated substantial euro reserves and were adding to them. That would be a definite vote of no confidence in our economy. That is not the situation here.

It's more than likely just a way for the Emirates to hit back because their pride has been injured. Think of a kid saying "I'm taking my bat and my ball and going home" when things don't go his way, and you have the general idea. The Saudis and especially the Syrians are just hopping on the bandwagon. (I mean, who really cares what the Syrians do? It's not like they are the big moneybags in the region...)

Bottom line: unless major commodities are priced on the world market in euros, yen, or renminbi, the dollar is still where it's at. Take note and see what they actually do in the next few months. More than likely it's just talk and a way to make our economy catch a minor case of the sniffles.

(Unless you are a NY Times writer, especially Krugman, since of course, this is the most horrible economic news EVER, and proof that cowboy Bush is mismanaging the economy....and we're all gonna DIE, I tell you!!)

Posted by: Desert Blondie   2006-03-14 00:55  

#3  above was me on laptop where cookie doesn't seem to stick.
Posted by: 3dc   2006-03-14 00:55  

#2  Seafarious: The Financial Times types have been debating this for 3 or 4 years at "SeriousTopics.com".

The Euro can't absorb this much cash in a profitable way. The only place to put lots of cash is the US.



Posted by: Glung Hupash4176   2006-03-14 00:54  

#1  *
Ima tempted to delve in with a few paras but...

let the Arabs play games, should be fun to watch!
Posted by: RD   2006-03-14 00:51  

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