Oil producers shun dollar

FT ^ | December 10, 2006 | Haig Simonian, Javier Blas, Carola Hoyos

[GodGunsGuts]

Oil producers shun dollar

By Haig Simonian in Zurich and Javier Blas and Carola Hoyos in London

Published: December 10 2006

Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.

Market liquidity is traditionally low in December, and many traders have locked in profits, potentially reinforcing volatility.

Russia and the members of the Organisation of the Petroleum Exporting Countries, the oil cartel, cut their dollar holdings from 67 per cent in the first quarter to 65 per cent in the second.

Meanwhile, they increased their holdings of euros from 20 to 22 per cent, the BIS said. The speed of the shift may help to explain the weakness of the dollar, which recently fell to a 20-month low against the euro and a 14-year low against sterling.

The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”

The review shows that Qatar and Iran, whose foreign exchange policy has sparked widespread market speculation, cut their dollar holdings by $2.4bn and $4bn respectively.

Such shifts may be modest compared with the total assets held, but they provide a crucial indication on future thinking.

Currency switches are likely to be progressive, subtle and discreet, as untoward attention could hit the dollar, lowering the value of depositors’ remaining dollar-denominated assets.

The last time oil-exporting countries cut their exposure to the dollar – in late 2003 – it pushed the euro to an all-time high against the dollar. Eighteen months ago, the exposure to the dollar of oil producing countries was above 70 per cent.

BIS data is the best guide financial markets have to the currency investment trends of oil producers, which otherwise do not provide figures. The rise in oil prices since 2002 means oil producing countries have amassed a current account surplus of about $500bn, according to the IMF. This is 2½ times the current account surplus of China.

Overall, Opec’s dollar deposits fell by $5.3bn, while euro and yen-denominated deposits rose $2.8bn and $3.8bn, respectively. Placements of dollars by Russians rose by $5bn, but most of their $16bn additional deposits were denominated in euros.

The dollar has suffered weakness because of concerns about global imbalances and the future course of the Federal Reserve’s interest rate policy.

Additional reporting by Peter Garnham in London

[Toddsterpatriot]

``The dollar is heading where the current account deficit goes,'' said Tim Mazanec, a senior currency strategist at Investors Bank & Trust Co. in Boston. ``A widening deficit will cause the U.S. more pain.''

Maybe you can explain to me why, if a foreigner takes his dollars and buys U.S. stocks or bonds, that will cause the U.S. pain, but if he takes those same dollars, earned from selling goods to America, and buys U.S. goods, that won't cause the U.S. pain?

[ChessExpert]

I think the falling dollar is caused by the recent election results. Results were anticipated somewhat before the actual election. Current events are continuously monitored to see just how far Left we will go.

America's socialist party won. Let's consider the possible economic implications. A) We will not take full advantage of domestic oil. B) We will not take further advantage of nuclear energy. C) The government may place more emphasis on affirmative action for women, blacks, homosexuals, etc., regardless of their office productivity. D) Price controls on drugs. E) Possible take over of medical industry. F) Hikes to the minimum wage (cutting off bottom rungs of ladder of success). G) Higher taxes. H) More regulation. I) Greater unionization. K) More government giveaways. L) Printing more money M) Anti red lining legislation to criminalize those who act on differential loan default rates. N) Demonizing and criminalizing business and businessmen. I'm sure there is more. That is just off the top of my head.

Much of the world is poor because they have socialism. The U.S. is/was different in having relatively secure laws. People could become rich in proportion to their contribution. The sky was the limit. That may just go away.

The smart money is watching, as always. Will the left go hog wild and sink this country? Will the Dems display some new found economic centrism? Will Republicans hold fast to free market principles?

I don't think foreign trade or free markets are the cause of recent declines in the dollar. Political markets are, as usual, the culprit.

[GodGunsGuts]

I agree with all your points, except for one. The dollar has been falling for years. It is being pushed down by our massive deficits, which seem to keep growing no matter who is in office. Tax cuts are good. But we need spending cuts even more. Something both the Republicans and the Demorats have not addressed for decades. Tax cuts without corresponding spending cuts often just turn out to be tax deferments.

[SierraWasp]

"America's socialist party won. Let's consider the possible economic implications. A) We will not take full advantage of domestic oil. B) We will not take further advantage of nuclear energy. C) The government may place more emphasis on affirmative action for women, blacks, homosexuals, etc., regardless of their office productivity. D) Price controls on drugs. E) Possible take over of medical industry. F) Hikes to the minimum wage (cutting off bottom rungs of ladder of success). G) Higher taxes. H) More regulation. I) Greater unionization. K) More government giveaways. L) Printing more money M) Anti red lining legislation to criminalize those who act on differential loan default rates. N) Demonizing and criminalizing business and businessmen. I'm sure there is more. That is just off the top of my head."

What a GREAT list!!! May I borrow it with proper attribution? I know a thread where this fits right in, right now!!!

[ChessExpert]

I went to the following source:

http://www.x-rates.com/d/EUR/USD/graph120.html

As I see it, the US Dollar started falling relative to Euro in mid October. I also looked at the following currencies: English Pound, Japanese Yen, Australian Dollar, South Korean Won. The US dollar started to fall relative to all these currencies starting in mid October 2006. Before that, the pattern was mixed. The US dollar did pretty well going back to mid June 2006. I don't have any charts that go back further. Maybe someone can give me a good link. But from what I've seen, the free-fall in the dollar started in mid October when the possibility of Democratic takeovers of House and Senate was no longer so remote.

[ChessExpert]

Sure. That's the great thing about FreeRepublic. We share ideas/facts.

[SierraWasp]

OMG!!! I'm so happy I don't have to pay you royalties everytime I copy and paste it... It's so danged good. Thank you ChessExpert. You put this list together so well, it's no wonder you're a "Chess Expert!" I want you on MY side, everytime!!!

[GodGunsGuts]

Here's a couple of charts that show the dollar index vs. gold (notice how long the dollar has been falling) and a foreign exchange loss chart vs. our major trading partners:

[jwh_Denver]

http://tinyurl.com/vsdgw

longer

http://preview.tinyurl.com/y6548w

[stefan10]

The EU or better the european countries are not a real player in this game.

The Euro countries did not really changed their dollar reserves and compared to the overall numbers we talk about these reserves do not really matter. The dollar is no reserve currency for most of the european countries and has never been in the last years or even decades.

The asians bought dollar and secured the dollar position with their reserves. Looking at the US current account deficit a dollar decline was more than clear and widely expected.

The Euro or Europe had and has no influence here beside the fact that it is natural for foreigners (to some degree) to buy euros if they want to lower their dollar reserves.

Someone posted here that countries might leave the Eurozone. I can assure you no country will leave the eurozone just the opposite will be true. In the long run all countries (including the UK) will have the Euro or at least will pack their currencies to the euro ( this would have the same result in the end).

The simple reason is that trade is much much easier, cheaper and with a lower risk within the Eurozone and so companies save a lot of money here.
And the pressure to adopt the ECB policy for EU countries that do not have the euro will increase over the years.

The same was true with the german mark. While countries like austria, the netherlands, belgium but also france and others still got their own currency they had to follow the policy of the german bundesbank because of the dominating position of the german mark ( the so called D-mark Block).

[expat_panama]

Thanks for the ping Guns.  At first the issues seemed all jumbled --the trade deficit was real bad (post  2), then it wasn't so bad after all (post 23) , then it was bad again (post 38) --and what does all this have to do with the price of oil? 

Your dollar-gold chart in post 48 cleared it all up.  It's not the trade deficit or the dollar-- it's gold; you want the dollar to tank so your gold will soar.

Now, what you do with your own money is your own business, but the rest of us are not about to swallow a bunch of junk mail advertisements posing as data charts.  

We can get the daily price of gold on our own (like, from here) as well as exchange rates (sites like this one).  What we've seen is that gold went up while less dollars bought more Euros, and now gold's tanked while the dollar's gone back to normal.

OK, things may still go better for you and we sure hope they do.  In the meantime, Todd and I will play it safe watching our stock prices soar.

[ChessExpert]

I found some easy to follow charts at
http://www.chartflow.com/ozforex/charts.asp

Going back to 1990 it looks like the dollar appreciates some, then we started the War on Terror. If the US fights a war and Europe and others skate by, that could make a difference. This brings the Cold War to mind also. Is it time to stop our "occupation" of Germany, Japan, and South Korea? Longer term, we certainly had high inflation through the Vietnam war - LBJ, Nixon. Of course one cannot forget the Carter years. These administrations were also highly socialist in the U.S.

The charts remind me of the Global warming debates. What you see often depends largely on the time frame selected.

[expat_panama]

What you see often depends largely on the time frame selected.

Exactly!   That's why I'm always getting the original numbers and plotting my own charts so I can just show the time frame that supports my viewpoint share the whole picture with everyone.

[NickFlooding]

The best way to fix this is to drill, drill and drill. Drill in ANWAR, off the coast of Floriduh, off the coast of Virginia and anywhere we can find oil and gas deposits. Drilling not only deprives our enemies of income is oh so sweet to our balance of trade but also leaves them (our enemies) holding the Euro bag when we are once again independent. Switching some power generators to domestic coal will help a great deal too!