UAE will diversify 10 per cent of its foreign currency reserves into euros

	DUBAI — The UAE is likely to diversify 10 per cent of its foreign currency reserves into euros in September this year when the central bank's board will once again consider the issue, Sultan Nasser Al Suwaidi said in Basel yesterday. The central bank's board met five times this year, and the issue will come up in September when the bank is likely to take a decision. The governor has indicated that central bank would shift about 10 per cent of UAE's $24 billion reserves into euros. “We are committed to diversifying 10 per cent of our reserves. When we have monetary union in 2010, a few years later we will float our currency. Once we float, we will be free to place our reserves where we want them,” Suwaidi was quoted by Bloomberg yesterday. Currently close to 98 per cent of UAE's reserves are now held in dollar. The government and the central bank have been discussing the possibility of shifting part of its reserves form early last year when the dollar began sliding against euro. A policy shift in foreign currency reserves held by the Gulf central banks favouring the euro is expected to apply major downward pressure on the US dollar, according to senior bankers and currency market analysts. In the context of a perennially weakening dollar, the central banks of UAE, Qatar, Bahrain, Kuwait and Oman have been considering shifting their reserves away from dollar. So far, only the UAE has gone ahead and announced a target of 10 per cent to be shifted. “With huge budget and fiscal deficits in the US, the outlook of dollar is weak. Any big change in the reserves will add to the woes of dollar in the medium term,” said the treasury head of an international bank. The Gulf central banks are increasingly favouring to hike the share of euro in their reserves because of the major gains made by the euro in the recent months and the overall negative long term outlook of dollar. The euro has risen 5.9 per cent against the dollar from January this year. It makes immense economic sense for the central banks to diversify their assets in the context of the declining dollar. In fact the dollar peg which all the Gulf countries currently have also can emerge a liability in the context of a secular fall in the dollar. In the past, all Gulf countries with their currencies pegged against the dollar had favoured dollar as their reserve currency. Currently, all these countries hold more than 70 per cent of their reserves in dollars. Analysts feel that the currency pegs will not necessarily be a factor that will limit the Gulf Central Banks from shifting their reserves to other currencies. “The current shift in favour of euro signals the evolution of euro as a major reserve currency. The dollar peg is not a major issue for the central bank while deciding policy on reserves. It can always revise the peg to reflect the current value of dollar against the domestic currency,” said an analyst. Analysts cite Kuwait's decision last month to revalue its currency upwards by one per cent as a proof that other Gulf central banks have the option to revalue and shift in the composition of their reserves. The six Gulf central banks together hold more than $250 billion in reserves. Foreign assets at the central bank of Saudi Arabia, the world's largest oil exporter, have more than tripled in three years to about $160 billion in 2005 from $42 billion in 2002.

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