C.banks up euro exposure at dollar's expense-poll
Sun Jan 23, 2005 07:01 PM ET
By Natsuko Waki
LONDON, Jan 24 (Reuters) - Nearly 40 central banks have increased their exposure to the euro in the past two years mainly at the expense of the dollar, according to a survey of 65 central banks released on Monday.
The poll, conducted by Central Banking Publications, also found that global central bank reserves were expected to rise to nearly $5 trillion by 2008 from $3.8 trillion in mid-2004.
The survey of official reserves managers controlling $1.7 trillion was conducted between September and December last year. It found 39 central banks reported an increase in their euro exposure while 29 reported a reduction in dollar exposure. Nine banks did not respond to this part of the poll.
"The euro seems to have come of age," the survey said.
"Although euro zone money and debt markets are often seen as lacking the depth, breadth and liquidity of those of the United States, over half of the respondents said that they are now as attractive to invest in as those in America."
Twenty four said they had raised their exposure to sterling while 16 said they had cut their exposure to the yen.
The survey backs up market speculation that central banks are changing the composition of their currency reserves, mainly to the euro's advantage, although it did not quantify by how much central banks were buying euros or other alternatives to the dollar.
Of the 65 banks surveyed, 16 said they planned to maintain the same proportion of dollars in their reserves in 2005, while 8 said they would raise the proportion of other currencies. The rest did not respond.
In recent years the greenback has fallen largely due to the huge U.S. current account deficit. It hit a record low around $1.3670 per euro in December , nearly 40 percent down from 2001.
Central banks make up an important part of the $1.9 trillion-a-day foreign exchange market. The belief that they have been diversifying into the euro out of the dollar has been a factor in the greenback's three-year decline.
SWELLING RESERVES
Total official reserves rose 66 percent to $3.8 trillion in May 2004 from $2.3 trillion at end-2000.
The survey showed over three quarters of the increase was due to reserves accumulation by Asian central banks -- which have intervened massively to curb their currencies strengthening against the dollar.
It said the increase was due to the maintenance of undervalued exchange rates and protection from capital flows, as well as the need to service increased foreign debt and heightened geo-political tensions.
With their accumulated reserves, central banks, mainly in emerging and developing countries, bought euros.
Three out of 10 central banks in industrialised nations said their exposure to the dollar had decreased and that their exposure to the euro had increased in the last two years.
SEARCH FOR YIELDS
The poll also showed income from reserve management is "important" or "very important" for 90 percent of the central banks surveyed.
"Generally, central banks' approach to reserve management is becoming much more active as they search for higher returns," it said.
"The central banks remain committed to diversifying portfolios further. Many central banks, especially in emerging-market countries, are diversifying into higher-yielding agency paper and securitised bonds," it said.
Prompted by the search for yield in the low interest rate environment, almost half of the central banks said their management has become more active in the last two years.
"We've grown in terms of the knowledge of our portfolio and risk managers defining forward-looking solid methodologies, and we've upgraded our technological platforms, enabling us to invest in more diverse markets other than plain vanilla fixed-income instruments," a central bank from the Americas told the survey.
More information on the survey will be found at
centralbanking.co.uk
(Additional reporting by Krista Hughes in Frankfurt)
© Reuters 2005. All Rights Reserved.
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