ALMERE- 27 Nov 2009

Stronger USD because of Dubai World?

One of the side effects of the problems at Dubai World could be a temporarily

stronger USD in the forex (foreign exchange) markets. Why?

Well if European banks will be forced to make write-offs on their exposure to Dubai World the ultimately result could that stronger USD. While everybody was under the impression that the income of exportations of crude oil would be more than enough to finance even the most prestige projects in the United Arab Emirates, according to Bloomberg Dubai (World) has borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub.

But how does that bookkeeping wise work if all the big banks have to make write-

offs? European have financed their USD lending to Dubai (World) with USD borrowings. The write-offs will created big "holes" on the asset side of their balance sheet while the USD borrowings on their liability side remain unchanged. So these banks, while having a Euro-based bookkeeping, need to buy USD to fill these "holes" on their balance sheet. These bought USD are, in other words, needed to repay the maturing borrowings.

While the other forces, market currents if you wish, will move the USD (much) lower against the EUR on a longer term basis, the Dubai (World) fall-out may create USD demand, especially towards year-end 2009. The amounts involved are that big that in thin markets large swings are possible. Today the EUR/USD spot rate stands at 1.4865 and already down from 1.51 a few days ago. Target now is for 1.45

Liekele Helmus