Central banks shift reserves away from U.S.

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Central banks shift reserves away from U.S.

By Chris Giles
Published: January 24 2005 00:03 | Last updated: January 24 2005 00:03

Central banks are shifting reserves away from the US and towards the eurozone in a move that looks set to deepen the Bush administration's difficulties in financing its ballooning current account deficit.


In actions likely to undermine the dollar's value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. The majority thought eurozone money and debt markets were as attractive a destination for investment as the US.

The findings emerge from a survey of central bank reserve managers published today and conducted between September and December of last year. About 65 central banks, controlling assets worth $1,700bn, took part and the results showed a marked change in attitude over the past two years.

Any rebalancing of central bank reserve portfolios has serious implications for the global financial system as the US has become increasingly dependent on official flows of funds to finance its current account deficit, estimated at $650bn in 2004.

At the end of 2003, central banks held 70 per cent of their official reserves in dollar- denominated assets and central bank purchases of US securities had financed more than 80 per cent of the the US current account deficit in 2003.


Any reluctance to increase exposure to dollar assets further could cause the greenback to plunge on currency markets.

"The US cannot take support for the dollar for granted," said Nick Carver, one of the authors of the study conducted by Central Banking Publications, a company that specialises in reporting on central banks.

"Central banks' enthusiasm for the dollar seem to be cooling off."

In a further worrying sign for the greenback, 47 per cent of reserve managers surveyed said they expected the growth of official reserves to slow to less than 20 per cent over the next four years. Between the end of 2000 and mid-2004, official reserves had increased by 66 per cent.

Slower reserve accumulation growth implies the supply of official finance is likely to become more limited but few expect the demand from the US for finance to slow. The consensus among economists is that the US current account deficit will increase to $694bn in 2005.

More than 90 per cent of central bank reserve managers said that the income from reserve management was "important" or "very important".

In the two years since a similar survey was conducted, reserve managers had begun to seek higher returns for the money under management.

For these managers, dollar assets have become less attractive because the fall in the dollar since 2002 has reduced the yield they received and, in some cases, has led to negative real returns.

Alan Greenspan, the chairman of the Federal Reserve, warned in November that there was a limit to the willingness of foreign governments to finance the US current account deficit.

The survey was conducted on the guarantee of anonymity for the banks involved. The 65 central banks that participated control 45 per cent of global official reserves. Individually, they had up to $250bn under management.

http://news.ft.com/cms/s/9ef63678-6d7d-11d9-9b69-00000e2511c8.html

This of course will be totally ignored by the mainstream press, but if does manage to get picked up on the neo-cons will find a way to spin it as being good for America. It's simply amazing. It'll be along the lines of "Rush - yea, our money is worth less than toilet paper, but that means Americans will be more likely to buy American."
 
How can you say this news will be totally ignored? It's been reported all over the place. JT

Here's one from Monday:

Euro Gains After Survey Shows Central Banks Increased Holdings

Jan. 24 (Bloomberg) -- The euro rose against the dollar after a survey sponsored by Royal Bank of Scotland Group Plc showed central banks boosted their euro holdings at the expense of the U.S. currency.

The 12-nation currency was also supported after failing to weaken below $1.2930 last week, a level that's technically significant because it was the euro's all-time high until Nov. 5, said Karen Jones, an analyst at Commerzbank AG in London. The dollar is up 4 percent from a record low of $1.3666 on Dec. 30.

``We've seen a moderate shift by central banks from dollars into euros,'' said Sonja Marten, a currency strategist at Dresdner Kleinwort Wasserstein in Frankfurt. ``Central bank buying is an ongoing, underlying support for the euro.'' Dresdner predicts the euro will climb to $1.38 by year-end.

Against the dollar, the euro advanced to $1.3060 at 5:02 p.m. in New York from $1.3039 on Jan. 21, according to currency- trading system EBS. The European currency pared some of its gain after France and Germany called for coordinated action by the U.S., Asia and Europe to stem the dollar's three-year decline.

``It's possible that the correction in the dollar is done,'' said Commerzbank's Jones. Still, ``my feeling is that we'll try to retest the $1.2930 level.'' Should the euro appreciate beyond $1.3150, the currency may extend its gain, she said.

Commerzbank was the second-most-accurate forecaster of the euro against the dollar in the 12 months to Sept. 30, according to a Bloomberg News survey of 50 firms.

`Too Big a Share'

The finance ministers from Germany and France, which account for about half of the economy of the countries that share the euro, said the U.S. current account and budget deficits are the chief causes of the euro's 34 percent rise against the dollar the past three years.

``We are agreed that the imbalances due to the U.S. double deficits that have caused the structural fall of the dollar'' continue ``and that everything must be put into place to remedy the situation,'' French Finance Minister Herve Gaymard said in a briefing with his German counterpart, Hans Eichel. ``Europe has until now paid too big a share in this readjustment.''

The ministers said a discussion of coordinated action would be on the agenda of the meeting of finance ministers of the Group of Seven industrialized nations in London Feb. 4 and Feb. 5. The deficit in the U.S. current account, the broadest measure of trade, widened to a record $164.7 billion in the third quarter of 2004.

Snow Comments

U.S. Treasury Secretary John Snow said today the U.S. was doing its part by trying to halve the federal budget deficit, which reached a record $412 billion last year. He said the G-7 will main support for orderly foreign-exchange markets and played down the central bank survey.

``The U.S. is blessed with the deepest and most liquid capital markets in the world,'' Snow told Bloomberg News. ``We're the envy of the world and they continue to be a source of investment opportunities, and I'm confident they will continue to be very attractive.'

Almost 70 percent of the 56 central banks that provided details of changes in their reserves said they increased holdings of the 12-nation currency in about the past two years, according to the survey conducted by Central Banking Publications Ltd., a London-based publisher, between September and December. Fifty-two percent said they reduced dollar holdings.

Not `Going Away'

``It only takes about a 1 percent shift in these reserves to have implications for the dollar,'' said Michael Metcalfe, a senior strategist in London at State Street Corp., the world's largest manager of funds for institutional investors. ``This isn't going away anytime soon.''

The share of dollars in total reserve holdings was 63.8 percent at the end of 2003 from 63.5 percent in 2002 and 66.9 percent in 2001, the International Monetary Fund said in its annual report in April. The euro proportion rose to 19.7 percent from 19.3 percent in 2002 and 16.7 percent in 2001.

``The dollar's rally is unsustainable,'' said Callum Henderson, global head of currency strategy in Singapore at Standard Chartered Plc. ``Central bank diversity is still out there as a negative; the report is pushing the dollar down a little.''

Some technical traders, including Jordan Kotick, at Barclays Capital in New York, said a consensus the U.S. dollar will decline through 2005 poses a ``risk'' to investors.

`So Bearish'

``Everybody is so bearish on the dollar, that I would consider it as a sign the dollar may actually rise,'' he said.

The yen has fallen 1 percent versus the dollar since reaching a five-year high of 101.69 on Jan. 17. It traded at 102.63 per dollar today from 102.70 on Jan. 21. Bank of Japan Governor Toshihiko Fukui on Jan. 19 said the yen's gain threatens a recovery in the world's second-largest economy.

Japan's currency may weaken on concern an increase in crude oil prices will further slow the pace of economic expansion, said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp. Japan imports almost all its oil.

Investors ``are much less positioned to buy yen right now, and with good reason,'' said Rennie. ``The market is downbeat on recent Japanese data. Oil is not helping the yen.''

The government will probably say Jan. 28 that Japanese industrial output fell 1.2 percent last month, based on the median forecast of 33 economists surveyed by Bloomberg News.

Participants in Bloomberg's weekly currency survey were less bullish on the yen. Forty-one percent of the 46 traders, analysts and investors polled from Tokyo to New York on Jan. 21 recommended buying the Japanese currency against the dollar, compared with 56 percent a week earlier. Twenty-eight percent said to sell, versus 15 percent. The remainder advised holding.

Crude oil for March delivery rose to am eight-week high of $48.81 a barrel on the New York Mercantile Exchange. Prices are 40 percent higher than a year ago.

The Organization of Petroleum Exporting Countries, which pumps more than a third of the world's oil, meets to consider production on Jan. 30. Oil futures have gained 20 percent since Dec. 10, when OPEC said it would cut production from Jan. 1.

``The events this week are negative for the yen,'' said Ashley Davies, a currency strategist in Singapore at UBS AG. The yen may fall to 138 per euro in the next few weeks, he said.



To contact the reporter on this story:
Richard Blackden in London
at rblackden@bloomberg.net;
Vivianne C. Rodrigues in New York at vrodrigues@bloomberg.net

To contact the editor responsible for this story:
Daniel Moss at
at dmoss@bloomberg.net.

Last Updated: January 24, 2005 17:43 EST
 
I've made a few dollars in the last year buying stock in three european companys and purchasing shares in several of my 401k accounts that deal in european banking, commodities,energy,and technology. Bottom line, ditch the dollar and buy euros.
 
You guys, it's NOT U.S. vs. Europe ok???? There may even be a group that's setting up the central bankers for a fall. Who knows what's really going on.
 
PS,

It's not JUST EUROPE that will fall. What will happen to OUR country if our government defaults on it's debt?

The same thing that would happen if S. American countries defaulted on their debt to us.

WORLD DEPRESSION.

Like I said, go watch Rollover. It will scare the cr@p out of you.
 
That's exactly what it's all about Wallew..

The banksters own vast amounts of wealth on both sides of the lake. They control the system by creating economic booms and depressions.
 
They're like most people, they put the money they control where it'll will do their investors the most good. To do this they must weigh profit potential vs. risk. Every so often they make too many risky investments and get burned.

Low points in the cycle can be great investment opportunities.

John
 
Jbt,

They're like most people, they put the money they control where it'll will do their investors the most good. To do this they must weigh profit potential vs. risk. Every so often they make too many risky investments and get burned.
Click to expand...

So, the SWISS bankers who financed NAZI GERMANY were doing a GOOD THING? After all, THEY did get 'burned' on that. Or did they? Jewish descendants of Holocost victims have been trying to get SWISS BANKERS to give back the SIX BILLION dollars they are STILL currently holding that belonged to all those Jews that were killed by Hitler.

Just curious?
 
Like Andy Jackson wanted, have no central bank. They keep printing money which our Gov. pays interest on.That is a no win situation. We should go by the Constitution and print our own dept free money.
 
My Dad's father (who died before I was born) actually owned a bank. On my father's wall is a $5 bill, signed by his father.

I have begged to get that once both my folks pass. I'm currently in negociations with my sister, as she wants it also.
 
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