Tuesday, December 05, 2006

Cagey Kuwaiti Won't Be Pinned Down on Dollar Support

Bloomberg's video service has a good interview of Kuwait's central bank governor avoiding an interviewer's questions about their reserves, their policy, and their discomfort with the dollar's recent performance. (Look for "Al-Sabah Says Kuwait May Widen Trading Band Against Dollar" at this page.)

The dollar's weakness has become a subject of conversation recently, and for good reason. Historically, the dollar sank to the equivalent of 1.33 euros in the 1970's, in the early 1990's, in January of 2005, and now again today. Each time in the past, it has revived; but there is doubt about its immediate future this time around, because the Fed has paused its interest rate hikes for fear of exacerbating an unsteady housing market.

Because the stats are inconclusive, everyone is waiting to see what the Fed will do and where the American economy will go from here. China, Japan and Korea have been jawboning about their exasperation with the US dollar's weakness, as have the Russians and others in the Middle East. And annoyed they should be, given as they have financed US debt and growth to a degree that is unprecedented in world history.

Have they taken on too much risk? This is entirely possible, and the jawboning evokes "The lady doth protest too much" in the sense that they themselves chose to invest this heavily in dollar instruments, and by doing so, they have put themselves in a Catch 22: They'd like to ditch the dollars, but they can't for fear of causing their portfolio's own demise -- hence the menacing guilt-ridden bark, but with little danger of a bite, at least not just yet.

We learn that Kuwait may also be feeling the pinch, having pegged their currency to a basket of currencies since the 1970's, but within the past few years having veered the pegging towards the dollar. The Sheik denies holding as much as 90% of their reserves in dollars like the UAE, but he will not give an exact figure, nor will he divulge how and when they might diversify their reserves away from our currency, in spite of the interviewer's persistent questions.

He does insist, however, that Kuwait is free to do so at any time.

More jaw rattling perhaps, but understandably so.
[Thanks to horniman.ac.uk for the photo.]


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