Central Bank has no US treasuries on books

The Central Bank has moved to ease concerns about the UAE's vulnerability to the US's US$14.3 trillion debt limit standoff.

The Central Bank does not hold US Treasury bonds or any other US government financial instruments because of the "very low return on holding these instruments", it said. AFP

The Central Bank revealed yesterday it holds no US treasuries or other American government financial instruments.

The announcement came as it sought to ease concerns about the UAE's exposure to the US government's debt limit deadlock.

It reiterated its support for the dirham's fixed exchange rate to the dollar, saying the currency peg was "steady" and "consistent".

"No fear on the US dollar, although it is exposed to price fluctuations as it happens with all the major currencies," the Central Bank said.

"Despite the fact that the Central Bank foreign reserves are mostly denominated in US dollars, they are invested mostly in non-US assets."

The bank does not hold US Treasury bonds or any other US government financial instruments because of the "very low return on holding these instruments", it said.

The announcement comes as the clock ticks on Tuesday's deadline, the date by which US politicians need to agree to raising the government's US$14.3 trillion (Dh52.52tn) debt ceiling.

Failure to do so will leave the world's biggest economy at risk of not being able to pay its bills.

Investors in the UAE and around the world are concerned about the stand-off weakening the dollar and US treasuries.

Economists said the Central Bank was likely to have invested in highly rated US dollar denominated bonds issued by governments or corporations of other developed countries offering higher returns.

The regulator said it made yesterday's announcement in response to questions from local and foreign media.

The UAE has strong links to the US and the dollar, the world's foremost reserve currency. It makes sense to hold most of the UAE's oil wealth in dollars as the commodity is traded in the greenback.

In common with four other of the six GCC states, the UAE's currency is linked to the dollar through a fixed exchange rate.

Dollar weakness can directly translate to the dirham, pushing up the cost of imports brought into the country.

Previous bouts of dollar weakness before the global downturn contributed to double-digit inflation and fuelled speculation about a re-evaluation of the dirham's peg.

But the overall rate of inflation is lower now because of continuing weakness in residential rents.

"The peg of the dirham to the US dollar is steady and consistent," the Central Bank said.

The Central Bank's foreign currency assets stood at Dh199 billion last month, according to Central Bank data. Of that amount, Dh86bn is in foreign securities, Dh74.86bn in deposits and Dh36.7bn in Dubai bonds. Dh1.5bn is in other assets.

Sultan Al Suwaidi, the Central Bank Governor, said last month the UAE still regarded US Treasury bills as a viable instrument but would consider diversifying reserves to include Chinese yuan.

"The UAE Central Bank has a smaller portfolio of foreign reserves than some other governments so they can afford to avoid the US treasury market," said Dr Giyas Gokkent, the chief economist of National Bank of Abu Dhabi (NBAD).

"In contrast, the size of Saudi Arabia's reserves mean a significant portion is likely to be in US treasuries as they need a deep market."

No breakthrough has yet emerged in the US debt ceiling stand-off.

The Republican-led US House of Representatives remains at loggerheads with the Senate and the White House over rival plans to raise the debt limit.

Barack Obama, the US president, has threatened a veto of the house speaker John Boehner's two-step plan to raise the debt ceiling.

But the Central Bank expressed confidence the issue would be adequately resolved.

"We believe that the debate on the US public debt ceiling issue will end with a compromise solution before the deadline date," it said.

"We do not believe that it is necessary to imagine that the US government may default on its debts given its enormous potential."