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Central banks may buy euro over dollar Original Source Link: (May no longer be active)
http://www.washtimes.com/upi-breaking/20050124-060718-7773r.htmhttp://www.washtimes.com/upi-breaking/20050124-060718-7773r.htm
Central banks buy euro over the dollar
By Donna Borak
UPI Business Correspondent
Washington, DC, Jan. 24 (UPI) -- The days of the dominant dollar may be running out, as central bank managers lean towards diversifying their portfolios by increasing their exposure to the euro over the dollar and creating a more investor-friendly climate, a survey released Monday said.
"The dollar weakness will cause many central banks to reduce the proportion of their reserves held in dollars," the report stated, citing a marked change from its previous survey taken in November 2002.
"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," the report added.
The survey conducted by Central Banking Publications in London, compiled data from 65 central bank reserve managers from around the world from September to December 2004, revealing an ever-evolving trend by central bankers to diversify at the margin as a result of the weakening dollar and a stabilizing euro. Authors of the report were Robert Pringle and Nick Carver.
"At present there is stability in the euro and its value is expected to increase against the dollar. In addition, overall the eurozone seems to have better fundamentals when compared to the United States, especially as it relates to fiscal debt and the trade deficit," one central banker in the Caribbean said.
Over the last two years, more than two-thirds of the 65 central bank reserve managers surveyed for the report increased their exposure to the euro. Additionally, over half of the bankers said they regarded both eurozone money and debt markets as being just as attractive as those in the United States.
Based on figures of the survey, of the 29 central banks that said they decreased their exposure to the dollar, 93 percent of them reported that their exposure to the euro increased. Only 15 out of the 65 banks increased their exposure to the dollar in total. The report also revealed that countries outside of the euro area showed an "exclusive switch" from the dollar to the euro.
According to respondents, two of the main reasons cited for the increase in the euro exposure were due to undervalued exchange rates and protection from capital flows. Based on the results of the survey, 48 percent revealed that the increase in reserves was to due to undervalued exchange rates, while 47 percent cited protection from capital flows. Other reasons cited by reserve managers included improving national credit rating, increasing foreign debt and the increased geo-political tensions.
Another highlight of the study revealed that 55 percent of reserve managers found the eurozone markets to be as attractive as U.S. markets, while 45 percent said they didn't.
"From a risk return standpoint, they are more attractive.(There is) greater choice, as good if not better liquidity, better relative return," one reserve manager indicated in the report.
Another reserve manager from a central bank in a European Union accession country added, "Importance of the European unit as an international investment currency is growing and it makes those markets more and more attractive to a reserve manager."
However, the 27 reserve managers who disagreed explained that though the eurozone's market had thrived in building a successful financial market infrastructure, there were certain areas that were still underdeveloped such as market liquidity, accessibility of market information and variety.
"European markets are still undeveloped in terms of alternative to government bonds such as investment-grade agency, corporate, mortgage or other collateralized bonds," said one central banker from South America.
However, a number of reserve managers who disagreed said that the current eurozone market was "well-suited for asset diversification."
Among the 65 reserve managers surveyed, they control $1.7 trillion in reserve assets, which is 48 percent of the global trade reserve, totaled at $3.8 trillion. The vast majority of reserve managers - 93 percent - said that they planned to continue building their reserves over the coming years. It is expected that reserves will reach $5 trillion by 2008.
"A large stock of reserves is seen as a means of protecting an economy as it stands as a guarantee that a country can meet its obligations in foreign currency, in the event of credit lines being closed," the report stated.
However, some reserve manager indicated that the accumulation of reserves would have to slow down eventually.
One of the main reasons cited for the increase in reserves was due to accumulations by Asian central banks. Nearly three-quarters of the rise were due to central banks in South Asia and South East Asia.
According to one reserve manager the future of the reserve will depend on the willingness of the Asian central banks to be able to absorb dollar-denominated assets and the attractiveness of the dollar.
"The pace of increase is likely to slow down with the correction of the American trade deficit and uncertainty of the dollar policy of the new United State administration," another South East Asian central banker added.
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