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[ChrisO]

Gulf News ^ | March 2, 2005 | Youssef M. Ibrahim

-- If you are parking life savings or investments in US dollars it is time to worry, says American billionaire George Soros, granddaddy of currency trading.
The mighty American dollar has lost 40 percent of its value in the past two years against other currencies and is expected to lose 20 percent more, Soros declared last week.

Coming from a man who amassed a $5 billion fortune buying and selling currencies since the 1980s, it was a heart-stopping statement.

He is not alone. Last week South Korea, whose economy ranks among the world's Big 10, said that its central bank will start putting its new trade surpluses, or government savings, in currencies other than the US dollar. Japan, China and Europe are known to be quietly moving in the same direction.

So the question hanging in the air is how worried should ordinary people be?

The United States, by far, is the world's largest economy. So when it coughs, we catch cold. While not new, it appears more serious than anytime before. Right now, America imports almost 50 percent more than what it exports.

The resulting trade deficit is being financed by international central banks and funds managers and, basically, you, dear reader.

Now American budget deficit stands at a record $477 billion with no end in sight. According to the American Congressional Budget Office the gap for the entire decade ending in 2013 will reach $2.4 trillion! That is the equivalent of the entire budgets of a couple of continents.

Therefore, the world has two choices. Either let it be or try to plug it.

Letting it be is not really an option. Ever since the end of the Second World War, the dollar stood as the international currency.

It followed that American banks and the American economy became a refuge where other countries kept their surplus money, or savings, held in things called US treasury bonds, notes and deposits - all nerdish names for Americans borrowing your money and guaranteeing to repay your bank interest rates that now stand at about 4.2 percent for it.

Robert Hormats, the vice-chairman of Goldman Sachs International, told The New York Times last week that the United States last year alone pulled in 80 percent of total world savings. That means the ones in trouble are those who lent the money, not those who borrowed it.

Even so, it was fine as long as the dollar was king. But now, Soros and others are telling us that the dollar is losing more value than the interest we are getting on it from America and there is another currency around called the euro that is stronger.

Over the past four years or so the euro has emerged as a new player. It gained 35 percent over its greenback competitor and is being used by the huge European economy of 350 million people in an old and rich continent.

It gets worse. To keep paying for the interest on the pool of treasury bills, notes and bonds it holds, the United States must continue to attract even more money from overseas against those new odds.

It is now estimated that America has to bring in some $60 billion per month just to repay interests on the bonds and deposits foreigners have lent it.

This is like a drug addict who has to take bigger and bigger doses to just feel stoned. And we all know how drug addicts end up.

One question raised by South Korea, Japan, Europe and, indeed, the Arabs is how long they would be willing to finance this drug binge and why should they.

Even if they are collecting interest on their money the total value of it is less - so one cancels the other. The big heat attack comes when these countries say enough is enough.

That means no more money coming into America, and no ability by America therefore to repay existing commitments, therefore a further drop, maybe even a collapse, of the dollar altogether.

The Australian treasury secretary, Ken Henry, last week likened the flood of money pouring into America to support its growing budget deficits to the stock market's boom, and the bust of the dot.com bubble of the late 1990s.

Such a crash would deeply affect the income of oil-producing countries, for instance, as they trade their oil for dollars. As it is they are losing money every time the value of the dollar drops against other currencies.

But what of the average person's deposits in dollars in any bank anywhere in the world? That, precisely, is the kind of conversation every Arab oil minister, prime minister, king or president, should have with their central bankers until they give a clear answer on what is plan B.

Why, for example, does my oil minister not start pricing my oil in euros? Why are Arab deposits still in dollars?

Because many bankers and oil ministers are hypnotized. They believe America is too big, too strong and too powerful to forfeit payments and that it can still borrow more because the world will lend it more.

But remember, the dot.com crash came too fast after everyone was absolutely sure that the miracle would go on forever.

Money is the most cowardly of commodities. In panic, it stampedes sometimes toward the abyss. We have seen it before - the Kuwaiti Al Manakh souk, the depressions of 1929 and 1980s in America and the collapse of dot.com, to mention some.

Youssef M. Ibrahim, a former Middle East correspondent for The New York Times and energy editor of the Wall Street Journal, is managing director of the Dubai-based Strategic Energy Investment Group.

[minime]

They have been saying this for such a long time... I bought my MDII place in march and already paid most of it. (I know, before the installments are due)

I saved thousands of EURO by taking advantage of the strong EURO back then. Good thing I paid most of it back then because the dollar only got stronger lately.

For me the investment in Dubai is a good one. If the dollar goes up (unlikely with Bush as president), and the Euro goes down the money in my bank acc will be less valuable. On the other hand, the property in Dubai will be valued better because Dubai is very closely linked to the USD.

I like the low dollar, it enables me to do sooooo much more with my Euros.

[ChrisO]

The transition from US$ to the EUR as the worlds treasury currency has started. China recently announced that they are going to peg their currency to a basket of currencies instead of just the dollar. China is the second largest holder of US$ bonds (>$500,000,000,000). If they start converting those reserves into EUR and other currencies it will initiate a major devaluation of the US$.

We will see $1.40 and maybe even $1.50 per EUR in 2006. The trend is about to turn around again. IMO

[Admiror]

Sorry but can somebody elaborate how is that going to effect the Dubai propert market in particular and the economy of dubai in general? I am totally ignorant when it comes to economics
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The church is near but the road is icy, the bar is far but i will walk carefully

[minime]

[ChrisO]

There is a much more important background. Once the US$ goes down in value most oil producing countries wont invest as much money in the USA as they do today, because losses in currency value will be higher than gains through business investment. Saudi Arabia e.g. is a huge investor in the USA. They will start to invest their money elsewhere, maybe they even start investing in their own countries much like Dubai is doing already. This will further strengthen the arab economies and property markets.

[Seabee]

Bear in mind that a large part of the driving force behind Dubai's development boom, and the rest of the Gulf that's allowing foreigners to buy property, is money flowing away from the US and Europe and looking for a new home. Since 9/11 and the freezing of assets arbitrarily declared to be "funding terrorism", people have understandably become nervous about leaving their assets in the US/Europe.
The bulk of the money funding the boom is coming from the rest of the world, not from Dubai itself.
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Life's too short to drink bad coffee

[Seabee]

Bear in mind that a large part of the driving force behind Dubai's development boom, and the rest of the Gulf that's allowing foreigners to buy property, is money flowing away from the US and Europe and looking for a new home. Since 9/11 and the freezing of assets arbitrarily declared to be "funding terrorism", people have understandably become nervous about leaving their assets in the US/Europe.
The bulk of the money funding the boom is coming from the rest of the world, not from Dubai itself.
_________________
Life's too short to drink bad coffee

[ChrisO]

That is probably correct, but Dubai invests its money in infrastructure projects and tries to transform its economy unlike many other arab countries.

I doubt that there is a large percentage of investments coming from the USA/Kanada into Dubai. They probably see all arab countries as one big breeding region for terrorists and wont invest any money there. At least not the average John Doe.

You are right that many huge arab investors have removed the greater part of their investments from the USA due to the new situation after 9/11.

[minime]

[rogethedodge]

Again, this transition from USD to EUR and other currencies as the world's benchmark is hugely exagerated.
Until a country can provide the stability and liquidity that is associated with the USD then the changes that we have seen in the last few years are merely temporary changes. The EUR has no chance whatsoever of becoming the preferred benchmark currency whilst the eurozone is basically so "socialist". I use this term in an economic sense, not a political sense.
The only serious economic threat to long-term dollar stability comes from China and there are such huge and fundamental stability issues there that no one could sensibly bet on it for some time yet.

[ChrisO]

The second wave is in full swing.

The USA is basically bankrupt in terms of US$, so they need to get rid of it...

[rogethedodge]

Perhaps they would like to buy some apartments in TLH