| Central banks buying euros instead of dollars { February 2007 } Original Source Link: (May no longer be active) http://www.bloomberg.com/apps/news?pid=20601087&sid=amBPECZLvbTE&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=amBPECZLvbTE&refer=home
Dollar Share of Reserves Falls to Lowest Since 1999 (Update3) By Simon Kennedy and Christopher Swann
March 30 (Bloomberg) -- The dollar's share of global foreign-exchange reserves fell to the lowest level in at least eight years as central banks accelerated their purchases of euros, the International Monetary Fund said.
Dollars accounted for 64.7 percent of reserves last quarter, down from 65.8 percent in the prior three months, the IMF said today in Washington. The share of euros climbed to 25.8 percent from 25.1 percent, reaching its highest proportion since the single currency was introduced in 1999.
``These figures show the euro consolidating its status as the world's second reserve currency,'' said Paul Mackel, currency strategist at HSBC Holdings Plc in London. ``We are moving toward a more bi-polar world in foreign exchange reserves.''
Over the past five years, reserve holdings of central banks have more than doubled, to $5.03 trillion from $2.05 trillion.
Central banks are drawn to Europe's expanding economy and its deepening capital markets, economists and officials say. Euro-region growth accelerated to its fastest pace in six years in 2006 and the value of corporate bonds sold has more than doubled in five years, to $1.9 trillion last year.
The euro climbed 11.4 percent against the dollar last year, its fourth annual gain in five. The advances have enhanced the attractiveness to central banks of the currency now shared by 13 European Union nations. Reserve holdings in euros climbed 8.3 percent last quarter, the most in two years, IMF data show.
In November 2006 People's Bank of China Governor Zhou Xiaochuan said China would diversify its foreign exchange reserves, which topped $1 trillion last year.
Growth Attraction
``The evidence suggests that the share of euros held in countries' reserve portfolios has increased,'' Federal Reserve Bank of Cleveland President Sandra Pianalto said at a conference in Prague on March 27. ``This appears to be consistent with the widening of the European Union and the prospective growth of the euro area.''
The euro-region expanded 2.6 percent last year. Confidence in the European economy unexpectedly rose to a six-year high and unemployment fell to a record low, reports showed today.
Pianalto said evidence suggests that developing nations are ``adding euros to their portfolios faster than they are adding dollars.''
The pound's share of reserves gained to 4.4 percent from 4.3 percent, today's IMF report showed. The yen's share rose to 3.2 percent from 3.1 percent.
Total reserves increased in the fourth quarter, rising to $5.03 trillion from $4.75 trillion. The IMF publishes currency allocations for only $3.33 trillion of the total reserve holdings. IMF quarterly reserve data goes back to 1999. On an annual basis, the dollar's share hasn't been lower since 1996.
Value Changes
The drop in the dollar's share may be partly because the value of the currency fell in the period. Reserve allocations can shift either because central banks bought or sold currencies or because the relative values of their holdings shifted. The U.S. currency fell 4 percent against the euro and 3.3 percent versus the yen in the final three months of 2006.
``A lot has been said about reserve diversification away from dollars but it is happening only at a glacial pace,'' said Marc Chandler, head of currency strategy in New York at Brown Brothers Harriman & Co. ``The reserve diversification appears to be more in terms of moving into different asset classes rather than a dramatic shift into different currencies.''
The attractiveness of the euro has grown since it began trading, after accounting for just 18.1 percent of holdings in March 1999. The central banks of Indonesia, United Arab Emirates and Venezuela have each said they plan to funnel more money into the currency.
Catching Up
The liquidity and breadth of euro-denominated financial markets are fast approaching those of dollar markets, economists Gabriele Galati and Philip Wooldridge wrote in a Bank for International Settlements working paper last year.
Companies sold a total of $1.86 trillion of bonds in euros last year, up from $1.55 trillion the year before, according to data compiled by Bloomberg. The growing size of the market has lured more companies to sell debt in the region, including from nations as diverse as South Africa and South Korea.
European Central Bank President Jean-Claude Trichet says the bank neither encourages nor deters central banks from buying its currency. ``We are not campaigning for the international use of the euro as a reserve asset,'' he told the European Parliament last week. ``We are neutral.''
Last Updated: March 30, 2007 12:43 EDT
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