Greenback's steady decline will hit asset valuations in the UAE

Dubai: The valuation losses of foreign assets due to the sharp decline of the dollar will be the second highest in the world for the UAE after China, according to international credit rating agency Moody's.

Assuming the exchange rate of the dollar falls from about 0.67 euro currently to 0.50 euro over the next two years - a very bold assumption - China is expected to lose close to $260 billion in valuation losses, while Japan could lose $190 billion.

"The UAE would face a relatively minor loss in absolute terms [if only the assets held by central bank alone is considered], but would be significantly affected if we were take account of the assets of its sovereign wealth funds (SWFs)," said Dietmar Hornung, vice-president and senior analyst of Moody's.

Moody's has not quantified the UAE's potential losses. However, said since February 2002, the dollar has lost more than 20 per cent of value against its main trading partners.

"The world's largest sov-ereign wealth fund is the Abu Dhabi Investment Authority [Adia] with assets worth approximately $1.3 trillion. If we included these assets in the analysis, the [losses of] UAE would rank second, right after China," Moody's said.

Opinions about the dollar's direction in 2008 are mixed, and it is not yet clear if it will manage to break the trend of recent years.

With the looming recession in the US economy, along with rate cuts by the US Federal Reserve and evidence that central banks and SWFs are shifting at least some of their assets out of the dollar, a further decline can't be ruled out.

Other GCC countries also boast impressive SWFs and large dollar-based reserves.

According Moody's analysts, a sharp US dollar decline would probably force some GCC countries - most likely the UAE and possibly Qatar - to follow Kuwait's example of letting their currencies appreciate against the dollar and/or shifting to a basket of currencies.

Nevertheless, they expect a loosening of the US dollar pegs to be gradual due to political compulsions.

The world's largest sovereign wealth fund is the Abu Dhabi Investment Authority [Adia] with assets worth approximately $1.3 trillion. If we included these assets in the analysis, the [losses of] UAE would rank second, right after China."