Market Reads Middle East News as Dollar Negative

The way the markets respond to news sometimes is more revealing of the market than the news itself. Consider news an economic advisor to Qatar's Emir is worried about the dollar and suggested that now is an opportunity to diversify into different countries and currencies. Dollar bears seemed to like this news, but two important points need to be made. First, Qatar's reserves by themselves are inconsequential. They are estimated around $7 bln. Second, Qater is not representative of the region. Over the weekend, the Governor of UAE's central bank was quoted by the news wires say, "The dollar is the currency of international trade, not the euro." The peg to the dollar was not going to be changed in the near-future. He told a conference in Morocco that UAE was not diversifying away from the dollar. Previously a news wire misquoted the Governor. In recent weeks, Saudi Arabia and Bahrain also reinterated their commitment to the dollar.

Separately, note that while the UAE has pulled out of talks to GCC monetary union, Saudi Arabia's Finance Minister indicated over the weekend that his country and Qater, Bahrain and Kuwait will proceed with their plans.

Dollar weakness does not appear to be a function of central bank reserve diversification, Qatar notwithstanding. Central banks are largely back in reserve accumulation mode after valuation and intervention weighed on reserves at the end of last year. The Federal Reserve custody holdings in April and May rose by 2/3 more than then entire first quarter of the year ($130 bln vs $78 bln).