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Opec sharply reduces dollar exposure

By Steve Johnson and Javier Blas in London
The Financial Times

Published: December 6 2004 21:12
Last updated: December 6 2004 21:12

Oil exporters have sharply reduced their exposure to the US dollar over the past three years, according to data from the Bank for International Settlements.

Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent in the third quarter of 2001 to 61.5 per cent.

Middle Eastern central banks have reportedly switched reserves from dollars to euros and sterling to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone.

Private Middle East investors are believed to be worried about the prospect of US-held assets being frozen as part of the war on terror, leading to accelerated dollar-selling after the re-election of President George W. Bush.

The BIS data, in the organisation's quarterly review, state that Opec countries' stock of dollar-denominated deposits has fallen by 4 per cent in cash terms since 2002 in spite of Opec revenues' surging to record levels this year.

Opec officials say the cartel is trying to protect its purchasing power per barrel, as Europe is its largest trading partner. Opec imports from Europe rose 29 per cent between 2001 and 2003 while those from the US fell by 14 per cent, according to Morgan Stanley, the US investment bank.

Simon Derrick, head of currency research at Bank of New York, said: "It makes sense to diversify their reserves as much of their spending is in the eurozone and Japan."

Opec officials also point to political motivations after the 2001 terror attacks on the US.

Middle Eastern foreign exchange reserves are relatively small - those of Saudi Arabia, UAE, Kuwait and Qatar are estimated at $61bn by BNP Paribas - but any switch may be seen as indicating the mood of private investors in the region, who control far greater wealth.

Hans Redeker, global head of foreign exchange strategy at the French bank, said the Patriot Act, introduced after September 11 to stop US financial institutions being used by terrorists to launder money, was worrying private investors.

"If you trade with what the US regards as a 'dodgy' bank, you are at risk of your assets in the US being frozen," he said. "After the re-election of George Bush, the Middle East started to sell dollars like crazy due to the fears of assets being frozen."

The BIS report also showed that, in spite of oil prices having risen 85 per cent since the fourth quarter of 2001, overall OPEC bank deposits have barely risen. "Oil reserves have not been channeled into the international banking system in the most recent cycle," the report said.

One school of thought is that Middle Eastern businesses and individuals increasingly prefer to invest at home, leading to sharp rises in real estate and equity prices in many countries. Another argument is that many Opec governments are having to increase public spending to support rapidly growing populations.

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