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Central banks reduce dollar holdings Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=10000103&sid=aHYMqgZrs7ys&refer=ushttp://www.bloomberg.com/apps/news?pid=10000103&sid=aHYMqgZrs7ys&refer=us
Central Banks Reduce Dollar Holdings, Survey Shows (Update5)
Jan. 24 (Bloomberg) -- Central banks are reducing their holdings of dollars in favor of the euro, according to a survey of 65 central banks, extending a three-year trend identified by the International Monetary Fund.
Almost 70 percent of the 56 central banks that provided details of changes in their reserves said they boosted holdings of the 12-nation currency, according to the survey sponsored by Royal Bank of Scotland Group Plc. Fifty-two percent said they reduced the share of dollar holdings. Nine central banks either reported no change or didn't answer the question.
The dollar lost 7 percent against the euro in the fourth quarter, falling to a record $1.3666 on Dec. 30. The currency's three-year decline may spur central banks to pare the proportion of their reserves held in dollars and make it harder to finance the U.S. current-account deficit, said Robert Pringle and Nick Carver, authors of a report on the survey's conclusions.
``The overwhelming trend we've seen is increasing exposure to the euro,'' said Carver, an assistant editor at Central Banking Publications Ltd., the London-based publisher which conducted the survey. ``Central banks have started to take the euro more seriously.''
Royal Bank of Scotland is the ninth-largest foreign-exchange trader, according to a 2004 Euromoney survey, accounting for 3.5 percent of the $1.9 trillion-a-day currency market.
`Dollar Bears'
The dollar fell to $1.3089 per euro as of 11:15 a.m. in London, after gaining 0.6 percent last week, according to EBS, an electronic trading system. The U.S. currency was at 102.87 yen, after advancing 0.7 percent last week to 102.70.
The survey ``is reminding people that the U.S. does have a funding problem in its current account and reinforces the views of dollar bears,'' said Marvin Barth, a currency strategist at Citigroup Inc. in London and a former Federal Reserve employee. ``This is very much a longer-term issue.''
The share of dollars in total reserve holdings was 63.8 percent at the end of 2003 from 63.5 percent in 2002 and down from 66.9 percent in 2001, the IMF said in its annual report in April 2004. The euro proportion rose to 19.7 percent from 19.3 percent in 2002 and 16.7 percent in 2001.
Central banks may trim the proportion of reserves held in dollars to about 60 percent in coming years, said Barth.
The dollar, up about 3.5 percent this month, may in 2005 end a three-year decline against the euro, according to a Bloomberg survey of 53 traders, strategists and investors published on Jan. 7. Forty-eight percent of people questioned separately on Jan. 21 advised buying the dollar against the euro this week, up from 40 percent a week earlier.
Current Account
The dollar lost more than six cents against the euro between Nov. 19 and the end of 2004 after Fed Chairman Alan Greenspan told the European Banking Congress in Frankfurt that foreign investors will tire of financing the current account deficit and channel their money into other currencies.
``While central banks will continue to some extent to finance the American current-account deficit, the United States cannot rely on this source of finance to the same extent as in the past,'' Pringle and Carver wrote.
The deficit in the current account, the broadest measure of international trade, rose to a record $164.7 billion in the third quarter. To compensate for the gap and maintain the value of the dollar, the U.S. needs to attract about $1.8 billion a day, or about $55 billion a month, based on Bloomberg calculations.
Shift in Reserves
The dollar fell against the euro on Nov. 23 after Russian Central Bank First Deputy Chairman Alexei Ulyukayev said the country may lift the amount of euros in its reserves.
``Most of our reserves are in dollars and that's a cause for concern,'' Ulyukayev told reporters in Moscow the same day. ``It's a real problem. Looking at the dynamics of the euro-dollar rate, we are discussing the possibility to change the reserve structure.''
More than half of those polled said they've decreased the portion of dollar holdings in about the past two years. Twenty- seven percent said they've done the opposite. Twenty-nine percent said they cut the share of reserves held in yen and 11 percent said they increased it. Forty percent stepped up accumulation of British pounds.
The survey doesn't provide an estimate of the total proportion of reserves held in any currency. Carver declined to identify any of the central banks questioned.
Last Updated: January 24, 2005 06:25 EST
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