Monday, December 18, 2006

Venezuela, Oil Producers Buy Euro as Dollar, Oil Fall


By Agnes Lovasz and Daniel Kruger

Dec. 18 (Bloomberg) -- Venezuelan leader Hugo Chavez is directing a growing share of the country's oil profits into euros as the dollar and crude prices fall.

The dollar, down 9.5 percent against the euro this year, may face more pressure in 2007 because Venezuela and oil producers from the United Arab Emirates to Indonesia plan to funnel more money into the single European currency.

``The U.S. dollar has suffered a long process of deterioration,'' Domingo Maza Zavala, one of seven board members at the central bank of Venezuela, said in a Dec. 14 interview. ``The diversification strategy started this year.''

Banco Central de Venezuela has slashed the percentage of its $35.9 billion worth of reserves invested in dollars and gold to 80 percent from 95 percent a year ago, said Maza Zavala. The country, the world's fifth-largest oil supplier, has boosted its euro holdings to 15 percent, from less than 5 percent in the same period.

The dollar has slumped against the European currency in 2006 as growth in the euro region outpaced the U.S. for the first time in five years. The dollar today fell against the euro to $1.3094 as of 6:55 a.m. in New York. The U.S. currency is little changed versus the yen this year, and currently trading at 117.81 yen.

Indonesia Buys Euros

Bank Indonesia is boosting euro holdings, said Senior Deputy Governor Miranda S Goeltom in a Dec. 13 interview in Jakarta. Indonesia has $39.9 billion in reserves. Sultan Bin Nasser al- Suwaidi, the governor of the Central Bank of the UAE, last month said he was considering when to shift as much as 8 percent of the nation's $24.9 billion in reserves into euros.

The central banks are changing policy ``because the oil price has come down a long way and the U.S. dollar has been declining,'' said Michael Derks, chief markets strategist at Arch Financial Products LLP, a London-based hedge fund. ``The euro stands to benefit.''

The Organization of Petroleum Exporting Countries, which produces 40 percent of the world's crude oil, said at a Dec. 14 meeting in Abuja, Nigeria, that it would cut output by 500,000 barrels a day to boost prices. Crude oil for January delivery fell 36 cents, or 0.6 percent, to $63.07 a barrel in after-hours electronic trading on the New York Mercantile Exchange. Prices have fallen from a high of $78.40 in mid-July.

Crude is priced in dollars and the U.S. is the biggest consumer, importing around $400 million worth of the fuel a day in 2005, according to data from BP Plc, Europe's second-biggest oil company.

Political Opposition

The share of foreign-exchange deposits held in dollars by OPEC members and Russia, the largest non-OPEC oil exporter, fell to a two-year low of 65 percent during the second quarter, from 67 percent during the previous three months, Bank for International Settlements figures released last week show.

Venezuela may also be motivated by animosity toward the U.S., said Rick Arney, chief currency strategist in San Francisco at Barclays Global Investors, which manages $1.7 trillion in assets.

``There is a political overlay to all of this,'' said Arney. ``Buying the dollar is not politically popular for some of these folks.''

Chavez, re-elected as President for six years on Dec. 3, told the UN General Assembly on Sept. 20 that the U.S. is ``the greatest threat'' to the planet, and has repeatedly described U.S. President George W. Bush as ``the devil.'' He also says Bush's administration is trying to have him killed.

Greenspan Comments

Chavez called on OPEC to sell oil denominated in euros rather than dollars at a meeting of the group in Caracas on June 1, supporting a proposal made by Iran.

Some analysts said the shift by oil-producing nations into euros is unlikely to weaken the dollar. OPEC nations reduced their dollar deposits by $5.3 billion in the second quarter, compared with holdings of $632 billion overall, according to data compiled by the BIS.

``It seems to be inconsequential in the large scheme of things,'' said Marc Chandler, global head of foreign-exchange strategy at Brown Brothers Harriman & Co. in New York. ``If anything, we should be surprised how small the outflow is.''

The euro climbed as much as 0.5 percent on Dec. 11, the most in a more than a week, when former Federal Reserve Chairman Alan Greenspan said there are signs OPEC nations are switching their reserves out of dollars.

`At the Start'

``A rising euro is a source of capital gain for central banks and a source for offsetting the capital loss created by the dollar'' decline, said Bankim Chadha, Deutsche Bank AG's head of macro foreign-exchange in New York and a former International Monetary Fund official. This gives ``an incentive to buy euros.''

OPEC members and Russia increased the percentage of their foreign-exchange deposits held in euros to 22 percent in the second quarter from 20 percent, the BIS said. By contrast, the global average is about a third, according to the Basel, Switzerland-based bank.

Oil states will probably buy the European currency at a faster rate to bring their reserves closer in line with other nations, according to David Durrant at Julius Baer Investment Management in New York.

``They've done very little diversification in the past,'' said Durrant, an investment strategist at Julius Baer, which oversees about $40 billion. ``We're at the start.''

To contact the reporters on this story: Agnes Lovasz in London at ; Daniel Kruger in New York at .

Last Updated: December 18, 2006 06:59 EST

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