EARTH: THE U.S. DOLLAR IS NOT AS DEAD AS SOME WANT IT TO BE

Reports of dollar's death greatly exaggerated, currency experts say

Countries with large dollar holdings are showing a new willingness to dump the dollar in favor of the rising euro.

Late last month, the United Arab Emirates became the latest country to shift more of its currency reserves away from the dollar, joining Russia, Switzerland, Venezuela and others.

Those moves come amid ambiguous signals from China recently about possibly pulling back from the dollar, and recent word from Iran, the world's fourth-largest oil producer, that it would prefer payments for oil, typically priced in dollars, in euros.

But currency experts say that this turn away from the dollar is not likely to do any long-term damage to the currency's value for a number of reasons. First, the motives of central banks that are adding other currencies to their reserves do not appear to be driven by the belief that the euro will eventually supplant the dollar as the world's key currency. Rather, these central banks are doing what investors typically do to minimize risk: diversifying their portfolios.

Moreover, the amount of currency moved so far has been relatively small in a global market that trades trillions of dollars a day — only about $2 billion in the case of the United Arab Emirates, for example.

"There is some indication that central banks are moving to diversify reserves, but it's at a very slow pace," said David Powell, a currency analyst with IDEAglobal. "Is it the start of a massive shift out of the dollar? I would say no."

Further, the lasting impact on the dollar's value when foreign central banks invest in other currencies is far from certain, analysts said.

"Most people think it does not influence exchange rates for any long period of time," said Edwin Truman, senior fellow at the Petersen Institute for International Economics who served for more than two decades as the director of international finance for the Federal Reserve. "It has some day-to-day effects, but not any big effects."

News of the United Arab Emirates decision was part of the reason the dollar fell against the euro, the British pound and the Japanese yen last week. Last year, the euro appreciated more than 11 percent against the dollar, and the British pound rose nearly 14 percent against the dollar.

But those trends seem to be driven by other forces, including varying prospects for growth around the world and changes in interest rates in the United States and elsewhere.

One reason the dollar is not likely to start flowing with great speed out of central banks is that foreign countries risk devaluing their investments if they do so. Even the slightest suggestion that a country is thinking about swapping dollars for euros risks sending the value of the dollar falling, and in turn hurts all foreign investors in U.S. securities.

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Pertinent Links:

1) Reports of dollar's death greatly exaggerated, currency experts say