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UAE sees no reason for alarm in U.S. debt row

UAE cbank sees compromise in U.S. debt talks; UAE to keep currency peg to U.S. dollar; Cbank says currently holds no U.S. treasury bonds

July 28, 2011 1:59 by

The United Arab Emirates’ central bank said on Thursday it was confident there will be a compromise to avert a U.S. debt default by an Aug. 2 deadline, adding that it holds no U.S. Treasury bonds or U.S. financial instruments.

Public comment on the U.S. crisis has been scarce from Gulf central banks and sovereign wealth funds, some of whom are major holders of U.S. Treasuries and other dollar assets.

Any sign of concern that would lead to institutions in the region dumping those assets to protect themselves would be likely to alarm financial markets more broadly.

“We believe that the debate on the U.S. public debt ceiling issue will end with a compromise solution before the deadline date,” the UAE central bank said in a statement.

“We do not believe that it is necessary to imagine that the U.S. government may default on its debts given its enormous potential, and we had seen in the past under President Clinton, the U.S. economy’s ability to reduce its public debt.”

A bill to cut the U.S. deficit faced a close vote in Congress on Thursday.

The UAE central bank reiterated its support for its currency peg to the U.S. dollar. It said a majority of its foreign reserves, denominated in U.S. dollars, were invested in non-U.S. assets.

“Central Bank of the UAE currently possesses no U.S. treasury bonds or any other financial instruments issued by the U.S. government due to the very low return on holding these instruments,” it said.

The UAE central bank held 199.1 billion dirhams ($54.2 billion) in total foreign currency assets at the end of June, of which 56.5 percent in the form of deposits, 25.7 percent in held-to-maturity foreign securities, and 222.2 percent in other foreign assets.

“The central bank of the UAE’s foreign reserves are around $56 billion dollars. Out of that $10 billion is Dubai government bonds…,” Giyas Gokkent, chief economist at the National Bank of Abu Dhabi.

“With the small portfolio, they are able to ignore the U.S. treasury market because it is not as large. If it was larger the central bank would have no choice but to invest as well. It makes perfect they say that it is a very low return, which is true.”

The region’s central banks usually do not disclose details of the composition of their foreign currency reserves and discussing reserve policy is a sensitive issue in the U.S.-allied region. ($1 = 3.673 UAE Dirhams) (Reporting by Stanley Carvalho; Additional reporting by Martina Fuchs in Dubai; Writing by Amran Abocar; Editing by Patrick Graham)

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