Ali
12-07-2005, 03:10 AM
Dollar’s rise aided by Opec holdings (http://news.ft.com/cms/s/9c6d7db6-64fe-11da-8cff-0000779e2340.html)
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 on Monday by the Bank for International Settlements.
The data will reinforce the view that the dollar’s surprise strength this year has been partly caused by Opec’s recycling of petrodollars. The currency has risen 13.5 per cent to $1.17 against the euro when most commentators had forecast a fourth straight year of losses.
Oil exporters have become financial kingmakers as real oil prices have leapt 170 per cent in real terms since 2001 to 25-year highs. The US Department of Energy estimates Opec oil revenues will total $430bn this year, up 27 per cent from 2004.
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.
While this may seem an obvious factor, BIS found that the currency composition of Opec deposits had become much more sensitive to changes in interest rate differentials than before. BIS found that many oil-producing nations had been net sellers of US Treasuries since 1997, instead buying corporate and agency bonds and equities with higher risks and rewards.
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. Interesting. OPEC members buy dollars, dollar strengthens...
...and if oil producing countries price and sell their oil in Euros...
The Real Reasons for the War With Iraq (http://www.ratical.org/ratville/CAH/RRiraqWar.html)
The Real Reasons Why Iran is the Next Target (http://www.globalresearch.ca/articles/CLA410A.html)
Iran Oil Bourse (http://english.aljazeera.net/NR/exeres/C1C0C9B3-DDA9-42E2-AE9C-B7CDBA08A6E9.htm)
I've posted these three links before, but they're posted here again, in the light of the FT report.
Here's another one:
Single GCC Currency (http://english.aljazeera.net/NR/exeres/6472D68F-7D5D-4F37-A7AE-C345CEF5117B.htm) It seems that at present there is little appetite - at least publicly expressed - to move away from the dollar peg, let alone consider invoicing future oil sales in Gulf dinars.
Reasons given for maintaining the status quo include the fact that the dollar is the de facto currency of international trade and that Opec oil sales are invoiced in dollars.
It is also a fact that GCC governments hold vast sums of dollar-denominated assets, such as US Treasury bonds. A move away from the dollar would see more uncertainty as to the value of these assets.
However, the dollar peg is not the optimal choice for the region's economies.
As GCC economies mature and attempt to diversify away from dependence on hydrocarbons, the utility of the dollar peg needs to be critically examined.
Even if the current arrangement is kept as a convenient convergence tool up until 2010, once launched GCC leaders should seriously consider viable alternatives such as a managed free float or a loose peg to a trade-weighted basket of currencies.
Key problem
One key problem with the dollar peg is that it effectively means that GCC central banks have outsourced their decision-making powers on interest rates to Alan Greenspan of the US Federal Reserve.
Not having independent monetary policy tools can be problematic, particularly in terms of combating inflation and encouraging growth.
As a consequence decisions on whether or not to cut, hold or hike rates are based on economic conditions in the US and these are not always the most appropriate for the GCC.
It is often the case that the US economy will grow robustly when oil prices are low while GCC economies will either experience low levels of growth or stagnation.
Conversely when oil prices are high the pace of US growth eventually slows, and US interest rates have been low for several years now in an attempt to stave off recession.
These low interest rates which the GCC central banks have to track, are now exacerbating inflation in the GCC and leading to the overvaluation of some stock-market and real estate-assets.
There is also increasing concern over the size of America's federal debt, which is almost $8 trillion. Its budget deficit this year alone is expected to be $600 billion. In recent years the US economy has been characterised by substantial budgetary deficits. It consistently spends more than it earns.
As a result, the US is becoming more and more dependant on foreign countries willing to hold dollars in their reserve accounts and buy its Treasury bonds.
Essentially the US Federal Reserve prints paper - Treasury bonds and dollar bills - and swaps these for commodities such as oil and consumer items such as Chinese household appliances.
The weakening dollar has also resulted in GCC imports from Europe becoming more expensive. When launched in 2002 a Saudi riyal was worth €0.29 euros; today it is worth only €0.21 euros.
This means that it has become 32% more expensive for GCC states to import goods from the eurozone, which happens to be the region's largest import partner. Unlike the US, the eurozone does not run large trade deficits, and the European Central Bank imposes strict limits on government deficits.
If GCC states were to start shifting some of their dollar-denominated assets into euro-denominated ones prior to currency union, it would provide a good hedge against the expected downward decline in the dollar.
Even more significantly if, post-currency union, the GCC decided to allow the purchase of oil in euros along with the Gulf dinar and other currencies, they would see their euro assets appreciate massively, as a greater number of oil-importing nations would hold higher levels of euros in reserve and therefore increase its value.
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 on Monday by the Bank for International Settlements.
The data will reinforce the view that the dollar’s surprise strength this year has been partly caused by Opec’s recycling of petrodollars. The currency has risen 13.5 per cent to $1.17 against the euro when most commentators had forecast a fourth straight year of losses.
Oil exporters have become financial kingmakers as real oil prices have leapt 170 per cent in real terms since 2001 to 25-year highs. The US Department of Energy estimates Opec oil revenues will total $430bn this year, up 27 per cent from 2004.
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.
While this may seem an obvious factor, BIS found that the currency composition of Opec deposits had become much more sensitive to changes in interest rate differentials than before. BIS found that many oil-producing nations had been net sellers of US Treasuries since 1997, instead buying corporate and agency bonds and equities with higher risks and rewards.
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. Interesting. OPEC members buy dollars, dollar strengthens...
...and if oil producing countries price and sell their oil in Euros...
The Real Reasons for the War With Iraq (http://www.ratical.org/ratville/CAH/RRiraqWar.html)
The Real Reasons Why Iran is the Next Target (http://www.globalresearch.ca/articles/CLA410A.html)
Iran Oil Bourse (http://english.aljazeera.net/NR/exeres/C1C0C9B3-DDA9-42E2-AE9C-B7CDBA08A6E9.htm)
I've posted these three links before, but they're posted here again, in the light of the FT report.
Here's another one:
Single GCC Currency (http://english.aljazeera.net/NR/exeres/6472D68F-7D5D-4F37-A7AE-C345CEF5117B.htm) It seems that at present there is little appetite - at least publicly expressed - to move away from the dollar peg, let alone consider invoicing future oil sales in Gulf dinars.
Reasons given for maintaining the status quo include the fact that the dollar is the de facto currency of international trade and that Opec oil sales are invoiced in dollars.
It is also a fact that GCC governments hold vast sums of dollar-denominated assets, such as US Treasury bonds. A move away from the dollar would see more uncertainty as to the value of these assets.
However, the dollar peg is not the optimal choice for the region's economies.
As GCC economies mature and attempt to diversify away from dependence on hydrocarbons, the utility of the dollar peg needs to be critically examined.
Even if the current arrangement is kept as a convenient convergence tool up until 2010, once launched GCC leaders should seriously consider viable alternatives such as a managed free float or a loose peg to a trade-weighted basket of currencies.
Key problem
One key problem with the dollar peg is that it effectively means that GCC central banks have outsourced their decision-making powers on interest rates to Alan Greenspan of the US Federal Reserve.
Not having independent monetary policy tools can be problematic, particularly in terms of combating inflation and encouraging growth.
As a consequence decisions on whether or not to cut, hold or hike rates are based on economic conditions in the US and these are not always the most appropriate for the GCC.
It is often the case that the US economy will grow robustly when oil prices are low while GCC economies will either experience low levels of growth or stagnation.
Conversely when oil prices are high the pace of US growth eventually slows, and US interest rates have been low for several years now in an attempt to stave off recession.
These low interest rates which the GCC central banks have to track, are now exacerbating inflation in the GCC and leading to the overvaluation of some stock-market and real estate-assets.
There is also increasing concern over the size of America's federal debt, which is almost $8 trillion. Its budget deficit this year alone is expected to be $600 billion. In recent years the US economy has been characterised by substantial budgetary deficits. It consistently spends more than it earns.
As a result, the US is becoming more and more dependant on foreign countries willing to hold dollars in their reserve accounts and buy its Treasury bonds.
Essentially the US Federal Reserve prints paper - Treasury bonds and dollar bills - and swaps these for commodities such as oil and consumer items such as Chinese household appliances.
The weakening dollar has also resulted in GCC imports from Europe becoming more expensive. When launched in 2002 a Saudi riyal was worth €0.29 euros; today it is worth only €0.21 euros.
This means that it has become 32% more expensive for GCC states to import goods from the eurozone, which happens to be the region's largest import partner. Unlike the US, the eurozone does not run large trade deficits, and the European Central Bank imposes strict limits on government deficits.
If GCC states were to start shifting some of their dollar-denominated assets into euro-denominated ones prior to currency union, it would provide a good hedge against the expected downward decline in the dollar.
Even more significantly if, post-currency union, the GCC decided to allow the purchase of oil in euros along with the Gulf dinar and other currencies, they would see their euro assets appreciate massively, as a greater number of oil-importing nations would hold higher levels of euros in reserve and therefore increase its value.