Thursday, June 03, 2010
Top central banks won't walk away from euro
Some of the world's richest central banks will not stop investing in the euro, supporting its reserve status, despite the sovereign debt crisis hammering the euro zone's currency, official sources said.
Government sources in Brazil, India, Russia, Japan and South Korea said that their reserve currency portfolios were too big to change without affecting markets, and there were no alternatives in the near term to the liquidity of the euro and the US dollar.
The five countries control nearly a quarter of the world's $8.09 trillion (Dh29.71trn) in foreign exchange reserves.
A Chinese government official said last week after the report that China's goal of diversifying its reserves will not change. The euro fell and stocks skidded, but later recouped some of their losses after China said on May 27 the report was groundless, adding that Europe will remain a major target of its enormous portfolio.
Like China, sources in other countries said that they were not going to walk away from the euro.
Top central banks won't walk away from euro
Some of the world's richest central banks will not stop investing in the euro, supporting its reserve status, despite the sovereign debt crisis hammering the euro zone's currency, official sources said.
Government sources in Brazil, India, Russia, Japan and South Korea said that their reserve currency portfolios were too big to change without affecting markets, and there were no alternatives in the near term to the liquidity of the euro and the US dollar.
The five countries control nearly a quarter of the world's $8.09 trillion (Dh29.71trn) in foreign exchange reserves.
A Chinese government official said last week after the report that China's goal of diversifying its reserves will not change. The euro fell and stocks skidded, but later recouped some of their losses after China said on May 27 the report was groundless, adding that Europe will remain a major target of its enormous portfolio.
Like China, sources in other countries said that they were not going to walk away from the euro.
"Even if the dollar or the euro is in trouble, is there anywhere else to invest? Not really. There needs to be a certain degree of liquidity," said a senior Japanese government official, who asked not to be identified because of the political sensitivity of the issue.
"Currencies of countries with capital controls won't work too. That leaves us with very few options," he said. Japan's $1.05trn in reserves are second only to China's $2.45trn.
The comments suggest the Group of 20 finance ministers and central bankers meeting in South Korea on June 4 and 5 will try to bring a message of reassurance and stability to financial markets, after the euro fell 10 per cent since April to four-year lows against the dollar. Government sources in Japan and India, though, were cautious about whether some European countries could do enough to prevent their deficits from becoming structural and if the crisis would spread to other countries.
"If Europe fails to make real efforts to alleviate market concerns, it's no use begging reserve managers not to sell the euro," another senior Japanese official said.
Few of the large reserve managers reveal the composition of their portfolios, though many economists believe central banks have been slowly shifting some of their dollar holdings to euro to diversify risks.
Brazil's central bank has six to 6.5 per cent of its $249.5 billion official reserves in euros, a Brazilian government source said.
The euro zone sovereign debt crisis will not affect the make up of Brazil's foreign reserves because the composition is based on the country's private and public debt, said the source, who did not want to be identified in order to speak more freely.
"If we end that policy, we will become a speculator. We will be betting that a certain currency will strengthen or weaken. We don't do that," the source said. "We, therefore, will not touch the euro, yen, dollar mix."
Some investors and economists have postulated that the dire outlook for Europe may push large central banks to look at other currencies, such as the Canadian dollar or Australian dollar.
However, all of the sources interviewed stressed their foreign reserves were kept to maintain macroeconomic and exchange rate stability and the euro still achieved that goal for now.
A government source in Russia's financial circles said reserve managers will not be able to move into Australian dollar-assets en masse because there just was not enough assets.
"That is not just true for the Australian dollar, it is true for other currencies, apart from euro and dollar – you cannot compare any other currency to them," the source said.
Lee Eung-baek, Director General of the Bank of Korea's reserve investment office, said there was very limited room for using any other currency than the dollar and euro as a widely held store of value.
"There are few alternatives, even when looking on a long-term basis," Lee said. "There can hardly be more than two or three reserve currencies."
emirates24/7
