The United Arab Emirates plans to shift 10% of its foreign exchange reserves from the dollar to the euro, according to UAE central bank governor Sultan Nasser al-Suweidi. Although he denied that the decision had anything to do with opposition in the US Congress to the takeover of some terminal operations at six US ports by a Dubai-based company, he accused the United States of having a double standard. It is against the principles of international trade, which the US was instrumental in making, he said.
The UAEs plan to shift reserves out of the dollar is a significant event that will re-emerge to haunt the dollar as the affair develops into subsequent stages, says Ashraf Laidi, chief currency analyst at MG Financial Group in New York. Of crucial relevance is the fact that this is the first time that an Arab Gulf state has expressed its intention to reduce its dollar holdings, he says. A key question is whether other Arab Gulf countries will do the same thing, according to Laidi.
Aside from the implications for the US capital account, the current account side of the US balance of payments could sustain a blow this month, he says, if the UAE-based Emirates Airlines decides to buy Europes Airbus A350 instead of Boeings 787 Dreamliner. The order is expected to amount to as much as $7.5 billion. On the capital account side of the ledger, as much as $200 billion is estimated to be invested in global assets by the UAEs Abu Dhabi Investment Authority, Laidi says.
The Bush administration is outwardly unconcerned about the flow of petrodollars drying up as the euro becomes more widely accepted by OPEC nations. When Treasury Secretary John Snow was asked directly about this earlier this year, he said that foreign purchases of US securities continue to be quite strong.