Which reserve currencies are left for central bankers, concerned first about the dollar, and now the euro?
Peter Garnham, the FT’s currency correspondent, points out that the likely beneficiary of the more recent euro crisis has been the dollar, “simply because other destinations – Canada and Australia for example – are simply not large enough for them to use as significant diversification destinations.”
Will this dollar-euro ping-pong continue, and, even if it does, are the combined euro-dollar fortunes of the past two years meriting ever smaller reserve allocations?
Central bank reserves might seem remote. But they have the power to affect every taxpayer in the euro-dollar areas. If your currency is a reserve currency, your government – and therefore you – effectively enjoy cheaper debt.
So, as the euro drops to a four-year low, are central banks destocking the euro? Well, there’s no shortage of rumours of concern. China, Iran, Taiwan and now Egypt have been mooted. South Korea and Kuwait have issued denials, and, as Peter points out, if they are destocking, they would be mad to mention it:
China maintained that the eurozone was an important investment destination for its FX reserves the week before last… But they would say that wouldn’t they? They are sitting on a lot of exposure to the eurozone and saying that they are considering their options would just push it lower … No large central bank is going to openly say it is reconsidering its euro exposure; it would be self defeating …
As Peter points out, a shift away from euro (or indeed dollar) reserves might be a gradual shift and one that is hard to spot: “Central banks don’t have to sell their euro holdings for the euro to fall. They just need to stop allocating new reserve accumulation towards the euro.”
