Treasury Secretary Timothy Geithner will seek to reassure Gulf Arab states this week that U.S. dollar assets they hold in large quantities remain a strong investment.

A recent decline in Saudi foreign assets shows the purchase of U.S. treasuries by Washington's Gulf allies, five having currencies pegged to the dollar, at levels seen in the past decades should no longer be taken for granted.

Geithner, offering assurances on the United States' ability to pull out of recession, is combining a visit to Saudi Arabia and the United Arab Emirates, the Arab world's largest and second-largest economies, with a trip to Europe.

He is unlikely to encounter any challenge to the dollar's global dominance on his visit to the world's biggest oil exporting region, analysts and diplomats said.

China and Russia have expressed concerns about the weakened U.S. currency staying as the only dominant reserve currency. But Beijing, which itself holds large quantities of U.S. assets, suggests any change would be a long-term affair.

The U.S. is looking to reassure Saudi Arabia and the GCC (Gulf Cooperation Council) countries on the outlook of the dollar and U.S. investments given the challenges for the U.S. economy and fiscal position, said Monica Malik, a regional economist at EFG-Hermes in Dubai.

Riyadh-based analyst John Sfakianakis added the trip was an important customer visit to one of the biggest holders of U.S. government paper and a seminal dollar supporter.

U.S. officials played down expectations that Geithner would pursue any major initiatives, but indicated that one of the aims was to ensure foreign investors would not lose faith in the United States as a primary target for their investments.

We will want to reiterate that we're open to foreign investment from the region, a U.S. official said.

Malik said realignments in world trade had already made their mark on GCC reserves.

There is already likely to have been a diversification of GCC reserves in terms of currencies over the last few years given the dollar weakness and the expanding trade with Asia and Europe, said Malik.

Saudi net foreign assets have fallen by around 183 billion riyals ($48.80 billion) since November, according to central bank data, as the world's biggest oil exporter dips into reserves built up over decades thanks to high crude prices.

Central Bank Governor Mohammad al-Jasser said in May the kingdom was not selling any foreign assets but was drawing on reserves to continue spending to keep the economy going.

Finance Minister Ibrahim al-Assaf told Reuters in May the G20 member kept diverse foreign exchange reserves, broadly reflecting trends in the kingdom's trade and needs.

TRADE COMPETITION

Geithner will address Saudi business leaders on Tuesday in Jeddah before holding talks in the UAE on Wednesday.

The United States is still the main trading partner for Saudi Arabia but Asian or European countries are making inroads.

A consortium including China Railway Construction Corp won a Saudi infrastructure deal worth $1.8 billion, while European aerospace group (EADS) just won its second defense contract in the kingdom, beating U.S. firms.

Another purpose of Geithner's visit was to make sure regional investors were not still put off by the political controversy that followed Dubai's DP World's acquisition in 2006 of a British firm that would have given it control over some U.S. ports.

Some U.S. lawmakers objected on national security grounds and state-owned DP World eventually transferred the operation of the terminals to an American entity.

We have a new process post-DPW and we want to make sure the process is fair and transparent and predictable, that it focuses appropriately on real national security concerns, the U.S. official said.

(Editing by Ralph Boulton)

(additional reporting by Raissa Kasolowsky in Dubai)

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