Dubai World Rescue Sends Risk FX Higher

Last updated 12/14/2009 2:44 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Dubai announced Monday that it has received $10 billion in financing from Abu Dhabi, which it will use in part to pay off the$ 4.1 Billion debt held by conglomerate Dubai World and its property unit Nakheel. Dubai Supreme Fiscal Committee Chairman Sheikh Ahmed bin Saaed al-Maktoum, stated that "We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices,"

The threat of Dubai world bankruptcy triggered a major wave of risk aversion over the Thanksgiving week-end as investors worried that the problems with Nakheel bonds could set off a domino effect of defaults in the region. The Dubai government faced massive pressure from international investors in the wake of the crisis, to guarantee the Nakheel paper and today’s rescue should ease some of those concerns for the time being.

However as many analysts have pointed out, the long term problems of too much debt and too much capacity continue to haunt the region and ultimately will likely lead to a haircut for bond investors. This is the second time since the start of the credit crisis that Adu Dhabi has served as a source of liquidity for the Dubai, but despite the fact the emirate runs one of the largest sovereign wealth funds in the world, it alone cannot continue to pay for Dubai financial obligations indefinitely and the final impact of this saga will likely result in a much more tempered pace of growth in UAE going forward.

The news helped to rally high beta FX off its Asian session lows with EUR/USD bouncing to 1.4700 level while pound temporarily spiked to 1.6300. However, the rally saw little follow through in early European trade as markets reconsidered the knee jerk reaction. The Dubai World restructuring news is clearly positive for UK banks which have major exposure to the region, but the possibility of renegotiation of other debts still leaves many other loans at risk. Meanwhile, the EZ export sector which has benefited mightily from the infrastructure build out in Dubai could see forward demand slow considerably as the region grapples with its credit problems. In short, today’s Dubai news was a welcome temporary boost for risk assets, but its long term impact remains problematic for now.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.