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FT: Developing Nations Dumping Euro from Official Reserves

By    |   Tuesday, 02 April 2013 07:44 AM

The financial crisis in Europe is provoking developing nations to dump the euro from their official reserves, and the euro also has forfeited the likelihood of rivaling the U.S. dollar for the foreseeable future, according to the Financial Times.

Data from the International Monetary Fund showed central banks in emerging countries slashed their euro holdings by 8 percent in 2012, with net sales of 45 billion euros.

Developing countries are shifting their foreign reserves to other currencies such as the Australian dollar and those of other emerging nations, the Times said.

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Jeffrey Frankel, a Harvard University professor of economics, said that while euro returns are no lower than the returns of the currencies of other big advanced economies, the related eurozone bond market is no longer as deep or as liquid as it was.

"The degree of integration across European financial markets has taken a step back in recent years," Frankel told the Times. "That is the dimension on which the euro has lost ground in international currency status."

Euros now make up just 24 percent of developing world reserves, the lowest since 2002, and down from a peak of 31 percent in 2009, the Times reported. The dollar has held firm at approximately 60 percent during that time period.

Meanwhile, the hope of the single European currency’s founders that it be a viable alternative to the dollar is apparently diminished.

"It'll be the number two international currency, but I wouldn't say there are any prospects of it challenging the dollar," Frankel predicted.

Edwin Truman, senior fellow at the Peterson Institute in Washington, also has a gloomy euro outlook.

"For the future, the effects of the euro crisis will linger, growth will be slow, interest rates will remain low, and the general attractiveness of euro assets [will remain] low," Truman predicted. "Meanwhile, the dollar is holding its own for now, and we are moving toward a multicurrency system."

Last week, in a sign China is expanding the international role of its renminbi, China and Brazil signed a $30 billion swap so that each can borrow the other's currency in the event of crisis in the international financial system.

“The euro, as it is currently constructed, is a doomsday device for mass bankruptcy,” a weekend commentary in The Atlantic stated.

“The eurozone doesn't have the fiscal or banking unions it needs to make monetary union work, and it's not close to changing that. In the meantime, the euro's continuing flaws continue to suck countries into crisis. And their politics get radicalized,” The Atlantic concluded.

Reuters reported the euro dropped on Monday to approach a four-month low on concerns about the spillover from Cyprus' bailout terms.

“Cyprus also reminded people of all the problems that dissuaded people from buying it [the euro] before: low growth, unemployment and so on," Daisuke Karakama, market economist at Mizuho Corporate Bank, told Reuters.

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The financial crisis in Europe is provoking developing nations to dump the euro from their official reserves, and the euro also has forfeited the likelihood of rivaling the U.S. dollar for the foreseeable future, according to the Financial Times.
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Tuesday, 02 April 2013 07:44 AM
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