America: "Even God Can't Sink This Ship"

Haig Simonian, Javier Blas and Carola Hoyos

FT.com

Monday, December 11, 2006 - Oil producers shun dollar - 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.