Published: January 27, 2005
FINANCE: BANKS AROUND WORLD
DUMP
SLUMPING DOLLAR FOR THE EURO
By Emad Mekay
WASHINGTON, Jan. 25, 2005 (IPS/GIN) -- Central banks around the world are getting rid of the U.S. dollar in favour of the European currency, the euro, in a bid to stem losses from the declining greenback, an international survey says.
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.
Monday's report also finds that over half of the central banks surveyed now regard euro-zone money and debt markets as being as attractive for investors as those of the United States.
The 12-nation currency was up Monday to 1.3086 dollars from 1.3044 late on Friday in New York.
Titled "Management Trends 2005", the report is published by the London-based Central Banking Publications Ltd. It surveyed reserve managers of 65 central banks, who control reserve assets worth 1.7 trillion dollars, 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 kroner, Danish krona and Canadian dollar.
A euro that cost only 84 cents in June 2002, and 1.21 dollars last September, now costs about 1.30 dollars.
The decline is mainly powered by the current account deficit in the United States, 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 a sign of how negatively the world has come to view the debt-ridden fiscal policies of the George W. Bush administration, which drained away the surplus it inherited from former president Bill Clinton.
It has turned a 236.4-billion-dollar surplus into a 413-billion-dollar deficit.
Some economists have long predicted a stampede away from the dollar and to the euro. The oft-heard suggestion, which many economists appear to support, is that the drop could erode the dollar's 60-year role as the world's reserve currency.
The report on Monday is the first concrete evidence that major central banks are actually taking that step.
"It's a smart move on their part to move not just to the euro; they can go also buy the (Japanese) yen. They can 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 Centre 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 said they see a greater appetite for the European currency in their central banks.
Late last year, finance ministers from the oil-rich Gulf region said they may move to the euro, and earlier this month, the Saudi Central Bank governor predicted that the euro would play a greater role in global reserves in the future.
Monday's report cites the dollar's weakness as the single most important reason why 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 U.S. current-account deficit through buying U.S. 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 percent 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 percent, 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 of time, the current decline of the U.S. currency may not look that steep.
"It doesn't particularly surprise me that at least some central banks are lightening up on their exposure to the dollar," 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 vs. 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 said.
If China and Japan, two countries with the biggest dollar reserves, decide to dump some of their dollar assets, the dollar is likely to completely collapse and go down far more than just the anticipated maximum of an extra 20 percent.
"The timing of any drastic moves 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."
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