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For a few dollars
less
By Kathleen
Moore
PRAGUE - It began with Russia. Over
the past few years, the Russian Central Bank has
reduced the share of dollars in its foreign
currency reserves, and has made no bones about it.
Then Indonesia said it, too, was considering such
a move. This week, Bahrain's central bank governor
said the euro is increasingly emerging as an
international reserve currency. And reports the
very next day - though later played down -
suggested that South Korea planned to sell some of
its dollar holdings to "diversify" its currency
reserves. Korea is the world's fourth-largest
holder of dollar reserves after Japan, China and
Taiwan.
Ashraf Laidi, a currency analyst
in New York, said it's clear why
"diversification", a trend by countries to hold
more of their reserves in currencies other than
the dollar, is a hot topic now. "This talk is
really part of central banks' growing unease with
holding on to a currency that has lost
approximately 30% of its value over the last three
years. It makes sense to hold on to something that
doesn't lose its value, doesn't it?" Laidi said.
Experts say it's difficult to say with
certainty to what extent the shift is under way.
Central banks often don't give out such
information. But a survey last month by Central
Banking Publications showed many central banks
have increased the share of their reserves held in
euros. They may not be actually selling dollars -
just buying fewer dollar assets, such as United
States government bonds, and more bonds
denominated in other currencies. That's bad enough
news for the dollar.
Laidi said it's a
gradual shift. "Russia two years ago started off
with nearly 90% holdings in US dollars. Today that
proportion has fallen to below 80%. And some
central banks are either considering or making
some moves in that direction. Many central banks
don't disclose the exact denomination in which
currencies they have foreign exchange reserves.
But currency traders have reasons to believe the
move is under way, albeit in a gradual manner."
To be sure, not all players are
diversifying. Japan, the biggest foreign holder of
US bonds, said on Thursday that it has no plans to
increase the share of euros in its reserves. But
experts say any shift is important. One reason is
that when central banks sell large amounts of
dollars, the dollar loses value in the foreign
currency exchange market. So any sign that the
biggest customers - central banks - are curbing
their enthusiasm for US dollar assets is bad news
for the greenback.
Gianluca Benigno from
London School of Economics said the trend is
likely to continue. "The euro is an alternative
reserve currency that central banks believe is
becoming more liquid and important," he said. "The
issue is likely to get more pressing in the next
few months. It started to create ripples months
ago when Russia began to release news about its
diversification strategy. There will probably be
similar news in the next few months."
As
Benigno noted, the shift also reflects the rising
importance of the euro. So could the dollar lose
its status as the world's chief international
currency? Experts say it's possible the euro will
at some point rival the dollar. But Malcolm
Sawyer, an economics professor at Leeds
University, said that's still a long way off. "I
can see a time, maybe 10-20 years hence, when the
euro and the dollar will have equal status, but I
think that is really some time off," Sawyer said.
"We are still in a position where much trade is
financed through dollars and many things like oil
are priced in dollars, which is also widely
accepted in many countries in the world. So I
think that for a long time, the preeminence of the
dollar will continue, although given the euro's
rise, it won't be quite as preeminent as it has
been."
For US exporters, however, a weak
dollar has been a welcome boost. "The biggest
winner is obviously the US manufacturing sector
because it's experiencing a huge gain in
competitiveness as the dollar sinks against the
euro," said Robin Bew, chief economist at the
Economist Intelligence Unit in London. Among the
winners are consumers from countries whose
currencies have strengthened against the dollar.
They're finding US products and holidays much
cheaper.
On the other hand, exports of the
eurozone have suffered considerably because of
dollar's steady decline. French winemakers rallied
in December to draw attention to their industry's
problems, including a falling dollar that makes
their bottles pricier in the lucrative US market.
Bew said many eurozone companies have seen their
profits fall as they cut prices to compete with
cheaper US products.
In recent months,
several European policymakers have complained
about the rise of the euro against the dollar. It
has raised the question of intervention - when
central banks sell or buy currency to influence
the exchange rate level. French Finance Minister
Herve Gaymard warned in December of a possible
"economic catastrophe" unless the US, Europe, and
Asia work together to stop the dollar's fall. Some
Asian banks have intervened to keep their
currencies from strengthening. But experts say
there's little likelihood of international
coordinated intervention. That's because the US,
they say, despite official rhetoric to the
contrary, is happy to see the benefits of the
dollar's slide - as long as it's gradual.
Copyright (c) 2005, RFE/RL Inc.
Reprinted with the permission of Radio Free Europe/Radio
Liberty, 1201 Connecticut Ave NW,
Washington DC 20036. |
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