Qatar & Vietnam ditch the dollar

Announcements on Thursday from the Qatari and Vietnamese governments that they are rapidly divesting in dollar denominated securities will not come as good news to the US government. Overseas investors hold half of America’s $4,400bn of marketable government debt, up from a third in 2001 according to the US Treasury department.

Qatari Prime Minister, Sheikh Hamad bin Jassim bin Jabr al-Thani said on US TV that the government-backed $50bn Qatari Investment Authority (QIA) now had less than 40 per cent of its investments in dollars, down from a high two years ago of 99 per cent.

Given that the Emirate’s oil and gas revenue is in dollars, the latest troubles in the US economy have accelerated the need to diversify investments into non-dollar markets. Currencies such as the Euro, the British Pound and the Swiss Frank, are all looking far more stable as investments for the QIA, said Sheikh Hamad.

Such was the Qatari PM’s concern about the sliding dollar, that he even said an oil price of $125 per barrel would not be unreasonable.

On Thursday, the State Bank of Vietnam quietly let slip it would be ending its dollar purchase schemes, which it has been using to hold down the Vietnamese currency. Although it only has middling dollar reserves of $40bn, Vietnam is widely regarded as a barometer for economic sentiment among other, bigger, regional dollar sinks like China, Taiwan, Korea or Singapore. Hans Redeker, currency chief at BNP Paribas, told the Telegraph:

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.

Cue dollar sale.

Asian investors have already pulled out of US Treasuries - as FT Alphaville reported in September, foreign government holdings of T-Bills fell 3.8 per cent in August.

Japanese investors in particular, reports Bloomberg, are anticipating another rate cut from the Fed. The world’s second largest actively run bond fund, Japan’s Kokusai Global Sovereign is staying away from US Treasuries. According to Masataka Horii, who oversees $47.6bn:

The US dollar will go weaker because the market expects that interest rates will be cut and the economy will slow down… Another rate cut will make the economy stabilize. Maybe early next year, weakness in the US dollar will stop.

The problem for the US is that foreign appetite for debt has become an important prop for the economy. A 2006 study by Federal Reserve economists concluded that foreign investment in the US economy has been a liquidity support keeping long-term interest rates 90 basis points below where they should be.