Dollar Reigns Supreme as Saudi Threat to Unload Is Deemed Hollowby
Kingdom faces challenge of finding alternative: BBH's Chandler
Thirty-year-old peg to the dollar adds to dependency
There’s one big problem with Saudi Arabia’s threat to unload its holdings of U.S. Treasuries: There are no alternatives.
The kingdom, with the world’s third-biggest currency reserves, has warned it would start selling U.S. holdings if Congress enacted a bill allowing Saudi Arabia to be held responsible in American courts for any role in the Sept. 11, 2001, terrorist attacks. That amounts to as much as $750 billion of Treasuries and other U.S. assets, the New York Times reported this month.
For all the saber-rattling, the fact remains that, as the world’s reserve currency, the greenback is the most-used in international trade by a wide margin. And Treasuries are the biggest and most-liquid bond market in the world at a time when debt from Japan and Europe is punishing investors with negative yields.
“If we’re talking about $7 billion it’s one thing, but it’s $700 billion -- what are they going to put their assets into?” said Richard Cooper, a professor of international economics at Harvard University and former under secretary of state for economic affairs. “It’d be a technical challenge to sell that many dollars.”’
Saudi Arabia isn’t the first to mull such a move. In 2014, Russia said it was considering shifting away from securities of countries that imposed sanctions amid the Ukraine crisis. The episodes highlight a dilemma: The dollar’s pre-eminence keeps these nations’ U.S. investments safe and liquid, and selling in any size risks undermining the value of those holdings.
At $13.4 trillion, the Treasuries market compares with Japan’s approximately $9 trillion of government debt and $1.7 trillion for Germany, data compiled by Bloomberg show. Beyond the sheer size of the U.S. market, it offers another appeal: positive yields. With the Bank of Japan and the European Central Bank pushing some interest rates below zero, yields in many maturities in those countries are negative -- debt due up to a decade from now in Japan, and through seven years in Germany.
“The problem of ‘There Is No Alternative’ is acute for about a dozen countries, especially Saudi Arabia," Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co., said in an e-mail. "Where would such a large sum of money be invested?”
The kingdom faces additional hurdles in weaning itself off the dollar. Oil, its largest source of revenue, is priced in the greenback, and the world’s biggest crude exporter has pegged its currency to the dollar for decades.
It’s anyone’s guess as to the value of Treasuries and dollar assets Saudi Arabia actually owns. The nation’s central bank doesn’t disclose how much of its $590 billion of currency reserves is in dollars, and the U.S. Treasury Department hasn’t detailed the country’s bond holdings for more than 40 years. Instead, it groups the figures in a basket with 14 other oil-exporting nations -- the tally came to $281 billion as of February.
Since world currencies started to float freely in the 1970s, the dollar has accounted for the bulk of foreign assets owned by governments and central banks. Even after the birth of the euro in 1999 and the globalization of China’s yuan in the past six years, the dollar still makes up 64 percent of the world’s foreign-exchange reserves, International Monetary Fund data show. Underscoring the dollar’s dominance, that figure is actually up from 61 percent in 2011, the year Standard & Poor’s stripped the U.S. of its AAA rating.
The bill that provoked the Saudi response faces a major roadblock: President Barack Obama has said he opposes the measure. The tension over the bill comes amid a renewed push to declassify a section of a 2004 U.S. government report on the Sept. 11 attacks that’s believed to detail possible Saudi connections to the plot.
Any Saudi move to dump U.S. assets may exacerbate the dollar’s 4.5 percent decline versus major peers this year and heighten volatility in financial markets. Unloading Treasuries might also complicate Federal Reserve efforts to keep yields from climbing too quickly as policy makers move to raise interest rates gradually. Foreign investors hold about $6.2 trillion of Treasuries, up from $4.4 trillion five years ago.
The Saudi Arabian Monetary Agency may have other reasons to liquidate dollars. In the past year, it’s burned through almost 20 percent of reserves to plug a budget shortfall as oil prices plunged.
Calls to the Saudi Arabian Monetary Agency and the Finance Ministry outside of regular business hours Tuesday weren’t returned.
The country’s 30-year-old peg to the dollar would also complicate attempts to reduce dollar holdings, said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington. The peg has been instrumental in shielding the economy from the volatility of oil and has helped anchor investor confidence.
“The interesting question is what do they do if they’re trying to maintain a peg to the dollar and they don’t have any dollar assets," said Gagnon, a former Fed economist. In terms of accumulating reserves, “if you’re a huge player, it’s hard for you not to be in the U.S.”