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Monday, June 02, 2008

It makes sense that if you are the US Secretary of the Treasury you would want to go where all the dollars are. And then, from there, talk about them.


No, Treasury Sectrtary Paulson is not threatening or about to strangle anyone. He is on a goodwill mission after all. Let us reason together. Let us tell the press things where they have to figure out what's enduring and what's temporal. That's always the question in markets, that and will the trend hold - and when will the trend stagnate or reverse.

The Monday June 2 WaPo carries the story, "NO quick Fix for Oil Prices, Paulson Says":

DOHA, Qatar, June 1 -- U.S. Treasury Secretary Henry M. Paulson Jr. said Sunday that there was no quick fix to high oil prices, which he called an issue of supply and demand.

Paulson said inflation in the Persian Gulf is "significant" but suggested that Gulf countries pegging their currencies to the weak dollar was not the only reason for it. He said it was each country's "sovereign decision" whether it wants to de-peg its currency [from] the dollar.

Speaking in the Gulf nation of Qatar, Paulson also acknowledged the U.S. economy was experiencing a "downturn" and reiterated that a strong dollar was in the U.S. interest.

With oil at record-high prices, Paulson said there is "no quick fix" because it is an issue of supply and demand. Global demand remains strong while "production capacity has not seen new development," Paulson said.

"I don't see a lot of short-term answers," he added.

Saudi officials said they already were meeting the needs of their customers worldwide and there was no need to pump more.

Saudi Arabian Finance Minister Ibrahim al-Assaf said Saturday that his country has no intention of de-pegging its currency from the weakening U.S. dollar. He spoke following a meeting with Paulson.

The dollar's decline has pushed the cost of imports into the Gulf, fueling inflation. It has also watered down the benefit of high oil prices.

Paulson will meet Monday with the managing director of the Abu Dhabi Investment Authority, the world's richest sovereign wealth fund. He will then travel to Dubai before returning to Washington.

Bloomberg News contributed to this report.


MarketWatch says much the same thing, emphasized somewhat differently:

Paulson: ending dollar peg not Gulf inflation cure
Treasury chief also says no 'quick fix' on oil prices; courts Arab wealth funds
By Lisa Twaronite, MarketWatch - 4:02 p.m. EDT June 1, 2008


SAN FRANCISCO (MarketWatch) -- Leaders of Gulf oil producing states told U.S. Treasury Secretary Henry Paulson that abandoning their currency pegs to the U.S. dollar will not solve their inflation problems, according to published reports Sunday.

Speaking in Qatar on a trip to that nation, Saudi Arabia and the United Arab Emirates, Paulson said leaders in the region have "quite an awareness that the peg does not influence inflation to a significant degree," according to Reuters.

"They recognize that inflation is the overriding issue ... Ending the peg is not the solution to the inflation problem," the Treasury Secretary was quoted as saying.

Qatar's inflation rate, around 13.7%, is the highest in the region.

Paulson also reportedly said Sunday that there was "no quick fix" to high oil prices, which he called an issue of supply and demand.

"I don't see a lot of short-term answers," Paulson was quoted as saying, adding that he would like to see "increased investment throughout the world in oil and gas and alternative sources of energy."

On Wednesday, David McCormick, Treasury's undersecretary for international affairs, said that Paulson will not make any specific request for nations to boost their production.

Courting wealth funds

On Monday, Paulson is scheduled to meet with the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, to woo oil-rich Arabs to invest in U.S. assets, the Wall Street Journal reported on its Web site Sunday.

Abu Dhabi is one of seven emirates that comprise the U.A.E.

Paulson told the newspaper in a telephone interview before his arrival in the U.A.E. Sunday evening that he hopes government funds will continue to invest in the U.S.

"We are open for business," Paulson was quoted as saying. "I don't anticipate any [political] problems with investments from sovereign wealth funds this year."

Last November, the Abu Dhabi Investment Authority pumped $7.5 billion into cash-strapped Citigroup Inc.

Treasury officials for months now have been working closely and quietly with the oil-rich Abu Dhabi government to help pave the way for further investment in the U.S., the newspaper report said.

Saudis reaffirm peg

On Saturday, Saudi Arabian Finance Minister Ibrahim al-Assaf reportedly said his country will continue to peg its currency to the dollar, citing benefits from the arrangement.

Saudi Arabia is a member of the Gulf Cooperation Council, an economic group of six Gulf Arab oil producers, and has a stated goal of creating a common currency by 2010.

Five GCC countries -- Saudi Arabia, the U.A.E, Qatar, Oman and Bahrain -- peg their currencies to the dollar, setting an official reference rate at which central banks buy and sell.

Since oil is priced in dollars, and most GCC currencies are pegged to the dollar, their massive foreign exchange reserves built up from oil sales are overweight dollars and their value is fully exposed to the dollar's swings in currency markets.

In May 2007, Kuwait abandoned its peg and now links to a currency basket which includes the dollar, euro, yen and sterling.

In March, the central bank of the U.A.E. set up a committee to study a possible de-pegging of its dirham from the greenback. The committee was expected to report its finding at the end of the year.


The Saudis are firm on the dollar being their currency basis, hence their oil is priced in dollars, effectively if not actually. And they need not have much of their own currency circulating internationally because they have tons of dollars to trade with. Kuwait broke ranks. And after all Bush the First did for them in the 1990 war (which they and the Japanese dutifully paid for).

MarketWatch had a link to the Saudis citing advantages to them to keep the peg, but checking the link showed it said nothing about what those advantages are. I expect when Paulson talked of the crude oil supply situation the Saudis again politely offered to build additional stateside refinery and a stand-off ensued.

Guardian carried a Reuters Monday June 2 feed, reporting with this focus:

By John Irish DUBAI, June 2 (Reuters) -

Gulf inflation is still rising at breakneck speed, new data signalled on Monday, spurring calls for gas exporter Qatar to drop its dollar peg and casting a shadow over U.S. efforts to restore support for the greenback.

Inflation in Qatar, one of six nations in the Gulf Cooperation Council (GCC) economic and political alliance, rose for a third quarter running in March to a near record of 14.75 percent, official data showed.

Qatar's steamy rate of inflation is symptomatic of the roaring oil-fueled growth in the Gulf Arab states, which has increased pressure on the GCC to shed the policy of pegging currencies at fixed rates to the weak U.S. dollar.

It also partly overshadowed the last day of a four-day tour to Saudi Arabia, Qatar and the United Arab Emirates by U.S. Treasury Secretary Henry Paulson to defend the dollar's status as the world's reserve currency.

Experts say the Gulf states are likely to review their currency pegs -- which forced them to cut interest rates in lock-step with the U.S. Fed -- as persistent inflation and booming economic growth threaten to destabilise their economies.

"Given the announcement today and the increase in inflation in the GCC, it is likely in the second half of this year that they will place this decision back on the agenda," said Hany Genena, senior economist at investment bank Gulf Finance House.

Forward currency contracts indicated that investors were betting on a 2.95 percent appreciation in the Qatari riyal in six months, 4.2 percent in a year and 8.4 percent in two years, showing that market participants were betting that the riyal would either revalue or be depegged.

As in other Gulf Arab oil producers, Qatar's economy is booming due to a near seven-fold surge in oil prices in the last six years, while it is having to lower interest rates because of its peg to the dollar. This is fuelling speculation that the country might drop the link in favour of a basket of currencies. Economists expect GCC economic output to surge past the $1 trillion mark in 2008 -- a three-fold increase in only five years -- but with the biggest risk coming from inflation due in part to the weak dollar, but also to supply bottlenecks for construction staples like cement, and to rising food costs.

Qatar faced many constraints on depegging. The main obstacle is whether Qatar should act alone or with its Gulf Arab partners, [Ibrahim al-Ibrahim, the top economic adviser to the country's ruler] said.

In nearby Abu Dhabi, Paulson appealed for support for the U.S. currency, which hit all-time lows versus major currencies earlier this year.

"The U.S. dollar has been the world's reserve currency since World War Two and there is a good reason for that. The United States has the largest, most open economy in the world, and our capital markets are the deepest and most liquid," Paulson told a business group in the UAE.

Kuwait dropped its peg in 2007.


The economies do not move in parallel. The Fed cuts rates and pumps liquidity into the investment banking sector, for domestic reasons; and arbitrage forces any nation pegging to the dollar to keep rates parallel, whereas the standard reaction to inflation is to boost rates to cool things off.

One Chinese reporting outlet echoed the theme, with currency stability and price of oil the focus:

Paulson, who is on an official visit in the UAE, said in his speech that dollar's value would ultimately be reflected in strong long term fundamentals, which "compare favorably to any advanced economy in the world."

On Sunday, Paulson said that officials in Saudi Arabia and Qatar told him they believe dropping their dollar pegs would not solve the soaring inflation.

Meanwhile, Paulson also said speculation and dollar weakness were not to blame for rising oil prices and the only way to solve the problem is to better balance supply and demand.

Last week, the oil prices hit a record high of 135 dollars per barrel.


There was only a passing mention of Iran in the Journal item quoted at the start, indirect, conclusory and not worth quoting.The other reporting had no other mention of Iran.

Bloomberg had an opening focus on duration of things in the US, and questioning of recycling petrodollars in US investments:

U.S. Treasury Secretary Henry Paulson said it will take ``months'' before financial-market turmoil ends and reiterated his commitment to a ``strong'' dollar.

``We're talking about months and there will continue to be bumps in the road,'' Paulson said in response to questions after giving a speech in Abu Dhabi at the end of a four-day trip to the Persian Gulf. Paulson was repeatedly asked about what the U.S. is doing about the weakness in the dollar, which has fallen 14 percent against the euro in the past year.

``Markets respond to economic fundamentals,'' he said. ``Every economy is going to have its ups and downs, and the U.S. is going through a tough period. I believe the long-term economic fundamentals will be reflected in our currency.''

Paulson's trip comes as U.S. financial institutions, reeling from the subprime mortgage crisis, have been forced to raise billions of dollars in fresh capital, some from the Middle East. He sought to assuage concerns raised by a 2006 Congressional outcry that prompted a Dubai company to abandon its bid to purchase six U.S. ports.

``I have met with many leaders from the Middle East who ask if the United States really continues to welcome foreign investment,'' Paulson said in his speech to the U.S.-United Arab Emirates Business Council. ``As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from sovereign wealth funds.''

The collapse of the U.S. subprime mortgage market and subsequent financial upheaval has led to more than $386 billion in asset writedowns and credit losses worldwide.

Middle East countries have accumulated $4 trillion to invest because of record oil prices, consulting firm A.T. Kearney said in a May 26 report. The region accounted for about half of the $3.3 trillion of the assets in the world's sovereign wealth funds last year, the report said. That includes the Abu Dhabi Investment Authority, the largest of the funds.

Paulson has urged the region's sovereign wealth funds to adopt voluntary codes of conduct being drafted by the International Monetary Fund to address concerns that the funds might be used to further political and strategic goals, and to defuse protectionist sentiment.

Abu Dhabi's fund invested $7.5 billion in Citigroup Inc. in November. Morgan Stanley and Merrill Lynch & Co. have also received capital from Gulf funds.

Paulson also urged Gulf economies to reduce barriers to international investment. He said greater overseas investment would allow oil-producing nations to increase output while also bringing new technology and creating jobs.

Record oil prices present Gulf countries with ``an historic opportunity to shore up their economic fundamentals, diversify their economies and make needed investments in human capital -- steps that should help avoid the boom and bust cycles of the past and support broad-based growth,'' Paulson said.

Oil has surged 90 percent in the past year and reached a record of $135.09 last month. Crude oil futures traded in New York today gained as much as $1.56, or 1.2 percent, to $128.91 a barrel.

The Gulf region faces challenges from rising oil revenue, including inflation, he said. Measures such as price controls and wage increases ``are likely to exacerbate the problem.''

Paulson repeated his stance that record crude prices were being driven by supply and demand, rather than speculation and the weakness of the dollar.

``There are no simple or quick remedies for this, and let me be clear in stating that the Gulf region alone cannot alleviate the pressures in global oil markets,'' Paulson said. He called for more investment in production technology and alternative energy sources.

``We are urging all oil-producing countries to open markets to foreign investment, which would support faster and more efficient growth,'' he said in the speech.

The U.S. has improved the process of reviewing overseas investment in areas of the economy that are considered important to national security following the opposition to a proposed investment by Dubai Ports World in 2006, Paulson said.

Paulson anticipated a faster pace of U.S. growth in the second half as the economy deals with a ``a trio of headwinds'' from the collapse of housing prices, turmoil in financial markets and record oil prices.

``Although I believe we are on the right path, a number of our important credit markets are still not functioning as normal,'' he said.


AFP, a Google hosted news outlet, expanded on that diversifying-recycling petrodollar wealth in a way that does not mis-resonate the way the aborted port management deal of a few years back did:

US Treasury Secretary Henry Paulson assured investors in the oil-rich Gulf region on Monday that the United States will remain open to sovereign wealth funds.

"As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from sovereign wealth funds," Paulson said in a speech in the United Arab Emirates, his third stop in a Gulf tour.

"We reject measures that would isolate us from the world economy," he said in Abu Dhabi, whose government controls a fund worth hundreds of billions of dollars.

Paulson acknowledged concerns in the region resulting from the Dubai Ports World debacle, when US congressional opposition forced the Dubai government operator to offload US operations acquired through its 2006 acquisition of P and O.

"Some here worry about growing protectionist sentiment in the United States, and they also worry specifically that US sentiment towards Middle East investment has been permanently affected by the Dubai Ports World case," Paulson said.

The US treasury chief said some SWF managers were also concerned about a US demand that the International Monetary Fund set standards for investments by the funds, but he said this was meant to counter calls for restrictions on those investments.

"In order to continue to benefit from sovereign wealth fund investment, we proposed that the International Monetary Fund develop a set of credible, best practices for these funds. The IMF expects to produce these recommendations this fall," he said.

"Among some sovereign wealth fund managers, our initiative has raised concerns that we are trying to limit the scope of their activities or release privileged information.

"In fact, our purpose is just the opposite. We are trying to quell calls for restrictions by urging sovereign wealth funds to endorse best practices to create a dynamic rise to the top and help allay concerns about opacity and systemic risks," Paulson said.


Bottom line, if the dollar slips as the exchange rate standard, and oil becomes priced on some currency basket method as Kuwait has adopted, US hegemony arguably is at stake. The quid pro quo has to be that when the Arabs are in a glut of dollars there has to be a diversification opportunity offered them, in dollar denominated assets and if massive amounts of other nations' wealth is pegged to a dollar there is less flexibiity to adapt domestic policy to smooth the bumps [much as nations in Europe gave up monetary soverignty in going with a uniform currency, the Euro].

Others who support the dollar might want more of a direct say in dollar-related policy. There are always ways to exert a voice when you sit on trillions of dollars in wealth, running great surpluses, but the range of action is limited - too much of any move risks kicking the spinning top over to its side to role in unpredictable directions, depending on chaotic dynamics that make mid- and long-term prediction difficult and error prone.

It is like many sharing golden eggs with any one unilateral misstep being able to kill the goose. It is less than a stable and comforting situation.