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The World Is Losing Its Acquired Taste for the Euro

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Friday, 04 Jun 2010 06:02 AM Current | Bio | Archive

Official sources in Brazil, India, Russia, Japan and South Korea have been reported as saying that their reserve currency portfolios are too big to change without affecting markets, and that there are no alternatives to the liquidity of the euro and dollar.

“Even if the dollar or the euro is in trouble, is there anywhere else to invest? Not really,” said a senior Japanese government official who asked Reuters not to be identified because of the political sensitivity of the issue.

“There needs to be a certain degree of liquidity,” the official said. “Currencies of countries with capital controls (e.g. China ) won't work. That leaves us with very few options.”

This means these nations have little intention of making significant shifts away from the euro.

However, these comments may be less significant than they first appeared to be.

In particular, we note that Japan already holds the vast majority of its reserves in dollars while Brazil only holds between 6 percent and 6.5 percent of its reserves in the euro.

Similarly, an official with direct knowledge of India 's reserve management said that the Reserve Bank of India (RBI) didn’t have significant euro exposure. Keeping it simple, we can say there is little danger of these nations to start selling significant amounts of euros because of their low holdings in euros in the first place.

The comments from officials in Russia and South Korea may also mean less than they first did.

A source in “Russia 's financial circles” said its reserve managers wouldn’t be able to move into the Australian dollar assets “massively” because there are simply just not enough assets.

“That is not just true for the Australian dollar, it is true for other currencies, apart from the euro and the dollar, and you cannot compare any other currency to them.”

Similarly, Lee Eung-baek, director general of the Bank of Korea's reserve investment office, said there is very limited room for using any other currency than the dollar and the euro as a widely held store of value “even when looking on a long-term basis.”

These comments are, of course, absolutely accurate.

Nevertheless, these statements miss the point of the debate to a large degree. The question isn’t about whether to move reserves into currencies like the Australian dollar. I think some funds will find their way into that category of currencies.

I think the question is whether or not to keep an increasing proportion of their foreign exchange reserves in the dollar, compared to the euro.

We also had that story of Iran ’s central bank planning to sell 45 billion euros of its reserves for, yes, unsurprisingly, dollars and gold. Iranian state television reported in December that the country’s reserves exceeded $80 billion. Dow Jones Newswires recently put that number at around $97 billion.

The Iranian website of state broadcaster Press TV said that it “seemed that” the first of three phases, a sale of 15 billion euros, started at the beginning of this month and that the operation would be complete by late September.

Jam-e Jam, a daily newspaper in Iran, also noted: “For those organizations which receive the most foreign currency, it is strongly recommended to minimize their trades in euros.”

The most vivid example of this issue is the significant reduction in the acceptance of euros for the sale of Iran ’s oil. It shouldn’t come as a surprise that Iranian officials at the central bank have declined to comment so far.

It also shouldn’t come as a surprise the markets have question marks about the amounts being talked about and the potential difficulties Iran might have in increasing its dollar holdings given United States sanctions against it.

So what do we really have?

It is true that central bank governor Mahmoud Bahmani told the daily newspaper Hezbollah on May 18: “Considering that the value of the euro is plummeting and that of the dollar is increasing, we will be examining the issue of changing the composition of Iran 's hard currency basket.”

Additionally, Jam-e Jam argued that the new policy move would reduce the proportion of euros in Iran 's total reserves to between 20 percent and 25 percent from a previous 55 percent.

Although this suggests that the amounts under discussion could be marginally less than the headline number quoted, such a shift would be a rational one, bringing Iran ’s reserve mix closer into line with its peers.

In short, it would make perfect sense for Iran to make the move under discussion.

My question, and I still don’t have a solid answer to it, is: For what reason or why would Iran tell anybody about their intentions of lowering their holdings in the euro?

After analyzing both stories, I find little contradiction between them. To my view, both confirm that reserve managers must, as I have already said here before, be reviewing their exposure to the euro.

It would be amazing if they weren’t doing that after the events of the past six months.

The appetite for holding euros under the current conditions is waning, that’s for sure.


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Official sources in Brazil, India, Russia, Japan and South Korea have been reported as saying that their reserve currency portfolios are too big to change without affecting markets, and that there are no alternatives to the liquidity of the euro and dollar. Even if the...
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2010-02-04
Friday, 04 Jun 2010 06:02 AM
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