Oil money flowing out of dollars

Sam Eaton Dec 11, 2006

KAI RYSSDAL: This is Marketplace from American Public Media. I’m Kai Ryssdal.

Trade experts say the controversy over the Dubai Ports deal sent a dangerous message to other Middle Eastern firms planning on investing in the U.S. According to a new report out from the Bank for International Settlements, those fears may already be playing out. Oil producing countries are shunning the US dollar for investments in the Euro and Yen. And given the recent run-up in oil profits we’re not talking pennies here. From the Marketplace Sustainability Desk, Sam Eaton takes a look at what this might mean for the greenback.

SAM EATON: Oil producing nations’ investments in the U.S. dollar have reached a two-year low. Earlier this year OPEC members and Russia slashed their dollar holdings. Currency analysts say the speed of that drop may help explain the dollar’s fall to a 20-month low against the euro and a 14-year low against sterling. Alex Beuzelin is with Ruesch International.

ALEX BEUZELIN: The U.S. dollar, because of its liability stemming from significant structural deficits, is very vulnerable to any decline in demand from overseas investors.

In other words, foreign investment is largely responsible for propping up U.S. debt, and keeping the U.S. dollar from crashing. With an amassed fortune of half a trillion dollars, Beuzelin says the world’s oil barons are the ones holding the reigns.

BEUZELIN: Their current account surplus is about two and a half times that of China — so it’s much more significant and poses a bigger risk to the value of the U.S. dollar than does the Chinese surplus.

So what happens if the greenback continues to lose its allure among foreign investors? A healthy dose of reality, says John Williamson with the Institute for International Economics.

JOHN WILLIAMSON: A weaker dollar is just what’s needed right now.

Williamson says a drop in the U.S. dollar could actually boost the nation’s economy. It would make U.S. exports more affordable and whittle away at the U.S.’s record $840 billion trade deficit.

In Los Angeles, I’m Sam Eaton for Marketplace.

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