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Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.

Market liquidity is traditionally low in December, and many traders have locked in profits, potentially reinforcing volatility.

Russia and the members of the Organisation of the Petroleum Exporting Countries, the oil cartel, cut their dollar holdings from 67 per cent in the first quarter to 65 per cent in the second.

Meanwhile, they increased their holdings of euros from 20 to 22 per cent, the BIS said. The speed of the shift may help to explain the weakness of the dollar, which recently fell to a 20-month low against the euro and a 14-year low against sterling.

The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”

The review shows that Qatar and Iran, whose foreign exchange policy has sparked widespread market speculation, cut their dollar holdings by $2.4bn and $4bn respectively.

Such shifts may be modest compared with the total assets held, but they provide a crucial indication on future thinking.

Currency switches are likely to be progressive, subtle and discreet, as untoward attention could hit the dollar, lowering the value of depositors’ remaining dollar-denominated assets.

The last time oil-exporting countries cut their exposure to the dollar – in late 2003 – it pushed the euro to an all-time high against the dollar. Eighteen months ago, the exposure to the dollar of oil producing countries was above 70 per cent.

BIS data is the best guide financial markets have to the currency investment trends of oil producers, which otherwise do not?provide figures.?The?rise?in oil prices since 2002 means oil producing countries have amassed a current account surplus of about $500bn, according to the IMF. This is 2½ times the current account surplus of China.

Overall, Opec’s dollar deposits fell by $5.3bn, while euro and yen-denominated deposits rose $2.8bn and $3.8bn, respectively. Placements of dollars by Russians rose by $5bn, but most of their $16bn additional deposits were denominated in euros.

The dollar has suffered weakness because of concerns about global imbalances and the future course of the Federal Reserve’s interest rate policy.

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Proposals by congressional Democrats to eliminate oil industry tax breaks and subsidies would set a bad example overseas and discourage new industry investments, Exxon Mobil’s top executive said Thursday.
Rex W. Tillerson said moves suggested by leaders of the incoming Democratic congressional majority would encourage similar steps by governments abroad, where Exxon Mobil Corp. generates the bulk of its profit.

“I think the bigger concern I have is not so much the economic direct effect of the fact that they want to take a tax break off here or there. But it’s the message it sends the rest of the world that you don’t have to provide stable (regulatory) frameworks,” Tillerson told reporters after a speech to the Boston College Chief Executives’ Club.

“And if that happens, none of us are going to be able to take the risk in this business.”

Irving, Texas-based Exxon Mobil, the world’s largest publicly traded oil company, earns about two-thirds of its profit from oil and natural-gas production outside the United States, and production is rising in Africa, the Middle East and Russia.

U.S. tax breaks intended to encourage steps such as refinery expansion and oil exploration “are not that material” to Exxon Mobil’s profit, said Tillerson, who spent years leading Exxon ventures overseas before being named chairman and CEO in January.

House Democrats have said they plan to target billions of dollars in oil company tax breaks for a quick repeal next year _ moves that come partly in response to high summer fuel prices and recent huge industry profit. For example, Exxon Mobil recently reported the second-largest quarterly profit ever for a publicly traded company: $10.49 billion in this year’s third quarter, second only to the $10.71 billion Exxon Mobil posted in last year’s fourth quarter.

Some Democrats also have suggested seeking a windfall profit tax on the industry _ a proposal Tillerson called “a terrible idea.”

Asked by an audience member whether oil profit were excessive, Tillerson noted the industry’s fortunes are tied closely to fluctuating oil prices that remain at historically high levels despite recent declines. He also said expensive ventures to find new oil reserves often fizzle out.

“If you don’t have the prospect from time to time do quite well, nobody’s going to take that risk,” he said. “We won’t make this kind of money forever.”

In his speech, Tillerson acknowledged a pressing global need for a greater mix of energy sources, and he said wind and solar energy can play a role. But he cautioned against expecting those sources to yield significant supplies of energy, given the globe’s increasing energy demand.

Absent any technological breakthroughs, “Fossil fuels will remain the predominant energy source for the foreseeable future,” he said.

Tillerson said government subsidies to encourage wind and solar power likely will yield double-digit annual percentage gains in energy produced from those sources.

However, he said, “People need to step back and keep that in perspective, and not mislead the public into thinking that’s how we’re going to get off oil if we do all these other things.

“Because it isn’t going to happen. They’re just not ever going to be big enough.”

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