Friday, June 02, 2006

The new Dollar sell-off

(Source Article: Dollar sell-off centers on Middle East -

Speculation that Asian central banks are selling dollars for euros has once again begun as the dollar has experienced a 7.5 percent slide against the euro since the start of March. However, this time it’s not east Asian banks such as those in China, but instead the dollar-rich banks of the Middle East.

With oil prices hitting all-time highs, and the official currency paid for oil being the dollar, Middle Eastern banks are full to the brim with the US currency; oil revenues for export countries surged from $US 256 billion in 2002 to more than $600 billion in 2005. Thus, it’s not surprising that Middle Eastern banks would be slashing their dollar reserves and adding euros—but diversification is happening much quicker than analysts originally thought, prompting concern, and suggesting that there’s more to the story; some believe that Middle Eastern nations are actively seeking to reduce the proportion of dollars in their reserves.

For instance, the United Arab Emirates has said that it might sell dollars in order to raise the percent of euros in its reserves from 2 to 10%. Other countries are studying the appeal of the euro over the dollar.

Early last month, the IMF began a series of talks with the US, China and other major countries in order to coordinate top-priority meetings about dealing with imbalances in the global economy related to the dollar sell-off’s effects on financial markets. Analysts predicted that the euro could rise to $1.40 over the next 12 months, from its current level close to $1.29 (see IMF acts to avoid markets meltdown - The Observer).

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