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French Version

Bahrain sees growing role for euro

International currency reserves could diversify away from Dollar

Bahrain sees a growing role for the euro in international currency reserves but is not in a hurry to diversify away from the falling dollar, the country's Central Bank governor said.

In an interview with Reuters late Monday, the head of the Bahrain Monetary Agency also said a group of oil-rich Middle Eastern countries planning monetary unification by 2010 could have a flexible exchange rate depending on the level of economic development.

Speculation the world's central banks, mainly Asian and Middle Eastern, are diversifying their vast foreign exchange reserves away from the falling dollar mainly to the euro has been a factor behind the greenback's three-year decline.

"As the European economy starts to grow and capture a bigger chunk of world trade I'm sure the eminence of the euro would become more visible. This is the function of the growth of the economies," Governor Rasheed Mohammed al-Maraj said.

"So far the dollar has depreciated but we are not going to take action based on these small changes. Our income is primarily in the dollar. From that point of view we haven't lost much."

Weighed by diversification speculation and general concerns about the U.S. current account deficit, the dollar has lost more than a third of its value in the past three years, hitting a record low per euro of $1.3667 in December.

"We are concerned about this fluctuation in the currency market. But we are managing reserves to back up our currency. We cannot adjust haphazardly from one direction to the other," Maraj said.

Bahrain's foreign reserves stand at just above $2 billion.

The dollar, highly liquid and used internationally for trade, has long been the world's preferred currency. It is backed by the world's biggest economy and is involved in nine out of 10 trades made on the foreign exchange market.

Maraj's comments came on the same day that billionaire investor George Soros said oil exporters' shift to euros would hurt the dollar. Speaking at the Jeddah Economic Forum, Soros linked the dollar's fall to that of the high price of oil.

The euro has been slowly increasing its share since its birth in 1999. A possible change in the pricing of oil to the euro from the dollar is also considered a vote of confidence for the single currency.

Maraj said: "Major producers have said they are not changing (the pricing of oil). Ultimately there might be some changes. But I don't think there will be any in a short-term horizon."

Like other oil-rich countries in the region, Bahrain pegs its currency to the dollar. The country, along with Saudi Arabia, Qatar, Kuwait, Oman and the United Arab Emirates, plan to create a single monetary union by 2010 under the Gulf Cooperation Council (GCC).

The GCC states, with largely similar economies, plan a common market by 2007, a crucial step to boost economic ties with their main trading partner, the European Union.

Maraj said the GCC has to finalize convergence elements including public debt and budget deficits this year before creating a single Gulf Central Bank and a single currency by 2010.

"Depending on what we agree on, this would be a key step toward achieving unification ... Although we have more or less great similarities with other countries, different countries have different levels of economic development," he said.

"The financial and economic burden of building and financing infrastructure and catering to population needs would be different from others."

He said the GCC has much to learn from Europe, which achieved a single currency after decades of preparation.

"Europe has set an example for all ... the economic blocs to learn from. I think the benefits have outweighed the costs so far," he said.

Beirut,02 28 2005
Redaction
The Daily Star
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