Dollar continues to decline, UAE sells a pile of dollars
The dollar may fall for a second consecutive day against the yen and euro before U.S. reports that are forecast to show consumer confidence dropped and existing home sales slowed.
Signs of weakening growth may boost speculation the Federal Reserve will cut interest rates next quarter, dimming the allure of dollar-denominated assets. The U.S. currency has dropped 9.7 percent this year versus the euro as investors bet the Fed will trail the European Central Bank in raising borrowing costs.
The Fed may get into a nasty bind next year. They can't afford to raise interest rates because it will kill the already weak housing market and the US needs cheap money to drive the economy, but the markets won't buy US investments if they don't.
The dollar dropped the most in more than a week against the euro yesterday after the head of the United Arab Emirates central bank said it will convert some of its reserves of U.S. assets into the European currency.
The U.A.E. is among oil exporters including Iran, Venezuela and Indonesia that are looking to shift their reserves into euros or price the commodity in the 12-nation currency.
The UAE shift works out to a little under $2 billion dollars, moving their reserves from being 98% dollar to 90% dollar. This is part of a general trend towards countries building up significant Euro holdings at the expense of Dollar reserves. And the countries that don't like the US are moving towards as much as 1/3 Euro holding and looking towards doing trade in Euros.
This trend will continue and result in the Dollar hodling ground or going down all 2007. As long as it doesn't happen too fast it may be a good thing, helping US exports and hurting companies that depend on imports. If it moves too fast the shock will cause a recession.
Jay