INTERNATIONAL. It has been widely reported in the international press that the Qatari and Vietnamese governments are rapidly divesting their US Dollar denominated securities in a move that is not good news for the US government, or in terms of convergence of the Gulf currencies.
Overseas investors hold half of America’s US$4,400 billion of marketable government debt, up from a third in 2001 according to the US Treasury department.
Qatar announced that it had cut the US Dollar holdings of its US$50 billion sovereign wealth fund from 99% to 40%, switching into investments in China, Japan, and emerging Asia. The move is intended to increase long-term returns for future generations, but it can easily be seen as a vote of no confidence in US economic management.
Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.
The Saigon Times said yesterday that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8%. Vietnam, which has mid-sized reserves of US$40 billion, is seen as weather vane for the bigger Asian powers.
Together Asia holds US$3,575 billion of foreign reserves, over 65% of the world's total. China leads with US$1,340 billion, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings.
The concern is that once one or two members of the region jump ship, it could set off a broader scramble, that would inevitably bring in the Middle East holdings.
None of them want to be the last one left holding a devalued asset. Vietnam's central bank said this week that it would move "gradually" to a floating currency.
The drastic shift by the Qatar Investment Authority is a warning that petro-dollar powers with some US$3,500 billion under management may pull the plug on the heavily endebted US economy, which needs to suck in the majority of the world's savings every month just to stay afloat.
"OPEC and Asia have been the two blocks funding the US current account deficit," said Hans Redeker, currency chief at BNP Paribas.
"Vietnam is a relatively small country but it is symptomatic of Asia. The entire region is seeing inflation move up as a result of mercantilist policies of holding down their currencies with 'dirty floats', which are designed to help their export sectors. They need to change monetary policy, " he said.
There have been reports that China is already pulling out of US bonds to fund its new sovereign wealth fund. Foreign central banks slashed holdings by US$32 billion in the last two weeks of August. We will not know which country was responsible until the Treasury's TIC data is released in November.
Japan also has colossal reserves, now near US$914 billion, but it is does not face the same inflationary threat as the rest of Asia and the Middle East, and is in any case an intimate military ally of the United States, rather like the position of Saudi Arabia.
Japan is likely to coordinate its dollar policy very closely with Washington for geo-strategic reasons.
Saudi Arabia set off jitters in the currency markets last month when it decided not to cut interest rates in lockstep with the US Federal Reserve, raising doubts about its commitment to the Saudi Riyal to the dollar peg. But it too has strong political reasons to stick with America.
Kuwait has already abandoned its peg, fearing that its economy would overheat if it continued to import America's loose monetary policies.
Separately, Iran said it would soon refuse to accept dollars for its oil exports, preferring to be paid in a "more credible currency".
It already receives 65% of payments in Euros and 20% in Yen, but insisted that the remaining 15% in dollars entailed an excessive risk of devaluation.
Iran's move is largely political, since oil is a hard commodity and the currency markets are highly liquid. However, if a number of OPEC suppliers began demand long-term futures contracts in Euros instead of US Dollars, this would have an impact over time.
In any event Qatar's announced unhitching from the dollar comes at a critical time and has a high symbolic value, as the Financial Times and others pointed out in editorials this week.
Suspicious-minded financial critics of the US administration are even asking if it could have anything to do with the North American Free Trade Area that the American power structure indeed seems to favour a scenario which would see a 'super state', or at least a common market, created from Canada, Mexico and the United States.
The lead currency of such a super state would be the so-called 'Amero'. Of course, the dollar itself will have to capsize in a big way before Americans will be persuaded to give up their precious currency, but that may not be such a far fetched notion after this week's events.