$us strength a result of opec support?

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    By Steve Johnson
    Financial Times, London
    Sunday, December 4, 2005


    Middle Eastern oil exporters have rediscovered their love of the US
    dollar in the past year, helping fuel the currency's rally to two-
    year highs against the euro, yen and sterling.

    The position marks a sharp turnround from the third quarter of 2004,
    when the proportion of bank deposits held in dollars by members of
    the Organisation of the Petroleum Exporting Countries slumped to a
    record low.

    By the middle of this year, the proportion of OPEC deposits held in
    dollars had rebounded from 61.5 percent to 69.5 percent, with the
    share held in euros falling from a high of 24 percent to 16
    percent, according to figures released on Monday by the Bank for
    International Settlements.

    The data will reinforce the view that the dollar's surprise strength
    this year has been partly caused by OPEC's recycling of
    petrodollars. The currency has risen 13.5 percent to $1.17 against
    the euro when most commentators had forecast a fourth straight year
    of losses.

    Oil exporters have become financial kingmakers as real oil prices
    have leapt 170 percent in real terms since 2001 to 25-year highs.
    The US Department of Energy estimates OPEC oil revenues will total
    $430bn this year, up 27 per cent from 2004.

    BIS attributes the sharp rise in the proportion of dollar deposits
    to the stabilisation of the dollar and the 300-basis point rise in
    US interest rates since June 2003, which has lifted the return on US
    deposits. In contrast, the European Central Bank only initiated its
    first rate rise of the cycle last week.

    While this may seem an obvious factor, BIS found that the currency
    composition of OPEC deposits had become much more sensitive to
    changes in interest rate differentials than before. BIS found that
    many oil-producing nations had been net sellers of US Treasuries
    since 1997, instead buying corporate and agency bonds and equities
    with higher risks and rewards.

    Meanwhile Marvin Barth, currency economist at Citigroup, reported
    anecdotal evidence of strong OPEC buying of Japanese and European
    equities. However, he argued that high oil prices would ultimately
    weaken the dollar by redirecting global savings from Asian countries
    such as China and Japan, which keep the bulk of their reserves in
    dollars for use in currency intervention, to the oil exporters,
    which, even now, are not as dollar-focused. Moreover, if interest
    rate differentials are key to OPEC behaviour, the start of the
    eurozone tightening cycle could end the dollar's newfound popularity.

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