SYDNEY, AUSTRALIA - SOME of the world's largest sovereign wealth funds are seeking to scale back their exposure to the US dollar in a sign of global concern about the currency, the Financial Times reported on Thursday.

The report said a large sovereign fund in the Gulf had cut its dollar-denominated holdings from more than 80 per cent a year ago to less than 60 per cent, but gave no source.

The FT also said China's State Administration of Foreign Exchange (SAFE) had been looking to strike deals with private equity firms in Europe as a part of a plan to reduce its US dollar holdings, citing people familiar with the matter.

The shift at China's SAFE, controlled by the central bank, was significant because it manages the bulk of the country's fast-growing foreign currency reserves.

The FT report said SAFE had been holding talks with Europe-based private equity firms about putting billions of dollars into their latest funds, precisely because these funds are not dollar-denominated.

By allocating money to Europe-based private equity firms, SAFE could diversify away from the dollar, at least at the margin, without unnerving the currency markets and driving the dollar down in a disorderly manner, said the FT.

In addition, SAFE is encouraging the private equity firms with which it has relationships to make investments in natural resources companies in markets outside the United States, in part to hedge its exposure to the dollar, said the report.

Last year, China launched a US$200 billion (S$270 billion) sovereign wealth fund, China Investment Corp (CIC), to earn greater returns on part of its foreign exchange reserves, which swelled by US$126.7 billion in the second quarter to a record US$1.81 trillion.

The dollar dipped after the FT report, though analysts believe that central banks and sovereign funds have been trying to limit their dollar exposures gradually and for some time.

'That's something that's been happening over the course of time, there's been a supply of dollars on any given rally,' said Mr Rick Lloyd, head of G10 currency trading at ABN AMRO in Singapore.

'The dollar just seems to be getting pushed around in the backwater of flows in other markets at the moment,' he added.

Prudent policy
Asian central banks, with about US$4.35 trillion in foreign exchange reserves, have never disclosed the breakdown of their official reserves, but analysts roughly estimate that the dollar proportion is about 70 per cent.

The dollar remains the dominant currency for global trade and investment and the United States has a bigger pool of liquid assets than any other market.

Mr Sean Callow, currency strategist at Westpac, said it was unclear whether central banks had ventured to sell dollars from their existing reserves, or had just diversified newly accumulated reserves to avoid sending the dollar into a nosedive.

'The question we would have is does this apply to incremental reserves or existing holdings, but either way, it's hardly surprising as central banks would only be prudent to diversify into different currencies,' he said.

The dollar bounced on Wednesday after US financial shares rallied and a high inflation reading seemed to rule out any further cut in US interest rates.

On Thursday, the dollar slipped 0.2 per cent from late US trade to 104.86 yen while the euro edged up 0.2 per cent to US$1.5851.

The dollar index, which tracks the currency's performance against a basket of six major currencies, dipped 0.2 per cent to 71.92. -- REUTERS