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Central banks dump dollar for
euro
By Emad Mekay
WASHINGTON - Central banks around the
world are getting rid of the US dollar in favor of
the euro in a bid to stem losses from the
declining greenback, an international survey
reveals. The survey says that more than two-thirds
of central banks have increased their exposure to
the euro in the past two years, mainly at the
expense of the dollar. The report also finds that
over half the central banks surveyed now find
euro-zone money and debt markets as attractive for
investors as those of the United States.
Titled "Management Trends 2005", the
report was published by the London-based Central
Banking Publications Ltd. It surveyed 65 central
bank reserve managers who control reserve assets
worth $1.7 trillion, between September and
December 2004. The survey was sponsored by the
Royal Bank of Scotland.
Since early
November, the dollar has hit record lows against
the euro almost every week, with a brief lull last
month. The greenback is now at 10-year lows
against almost all other major traded currencies -
the British pound, Japanese yen, Swiss franc,
Australian dollar, Swedish krona, Danish krone and
Canadian dollar. A euro that cost only 84 cents in
June 2002, and $1.21 last September, now costs
about $1.30.
The decline is mainly powered by
the US current account deficit, or the gap in trade
in goods and services, investment returns and
one-way financial transfers between the United States
and the rest of the world. Analysts say the currency's
plunge is also a sign of how negatively the
world has come to view the debt-ridden fiscal policies
of the George W Bush administration, which
has drained much of the surplus it inherited from
the Clinton coffers. The current administration
has turned a $236.4 billion surplus
into a $413 billion deficit.
Some
economists have predicted a stampede away from the
dollar and to the euro. The oft-heard suggestion,
which many appear to support, is that the drop
could erode the dollar's 60-year role as the
world's reserve currency. The report, released on
Monday, is the first concrete evidence that major
central banks are indeed taking that step. "It's a
smart move on their part to move not just to the
euro, they can also buy the yen. They can even buy
gold or move to a whole mix of assets to get away
from the dollar, which is overvalued," said Mark
Weisbrot, co-director of the Center for Economic
and Policy Research in Washington. "It's going to
have to fall eventually. The question is when."
China, which has the world's
second-largest dollar reserves after Japan, has
said publicly it will not get rid of its dollars,
but many other nations have indicated a greater
appetite for the European currency. Late last
year, finance ministers from the oil-rich Persian
Gulf region had said they might move to the
euro. This month, the Saudi central bank
governor predicted that the euro would play a
greater role in global reserves in future.
Monday's report cites the
dollar's weakness as the single most important reason
many central banks are reducing the proportion of
their reserves held in dollars. "This could imply
that some will emerge as net sellers of dollars.
This finding represents a marked change from the
previous survey in November 2002 when currency
composition in aggregate appeared to be stable,"
said the report.
While central banks will continue
to some extent to finance the US current account
deficit through buying US securities, the United
States cannot rely on this source of financing to the
same extent as in the past, said the survey.
"Diversification from dollar-denominated to
euro-denominated assets appears to be taking place
more rapidly than had been anticipated two years
ago," it said.
The trend is likely to
continue, with some economists arguing that the
dollar needs to decline by another 15-20% in order
to cut the current account deficit to a reasonable
level. Most of this correction should take place
against Asian currencies, which will require China
to revalue its exchange rate against the dollar by
about 20%, according to C Fred Bergsten, director
of the Institute of International Economics (IIE)
in Washington.
Because central banks have
been accumulating dollars over a long period, the
current decline may not look that steep. "It
doesn't particularly surprise me that at least
some central banks are unloading their dollar
holdings," said Steve H Hanke, a professor of
applied economics at Johns Hopkins University and
senior fellow at the Cato Institute in Washington.
"The expectation was that as soon as the euro
currency came out, there would be some
diversification in central banks' portfolios,
independent of the trends in the euro value versus
the dollar and things like that."
But the
fall could quickly turn into a major plunge if
panic spreads among private investors and moves on
to infect central banks, some economists say. If
China and Japan, two countries with the biggest
dollar reserves, decide even to dump some of their
dollar assets, the dollar is likely to collapse
completely and go down far more than just the
anticipated maximum of an extra 20%. "The timing
of any drastic move by big players is very hard to
predict," Weisbrot said. "China and Japan for
example, either one of those, can cause a complete
crash, a total collapse of the dollar just by
selling a small portion of their reserves. In
fact, probably they won't have to sell their
reserves, all they have to do is stop accumulating
or slow down their rate of accumulation and it
will be a dollar crash."
(Inter Press
Service) |
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