JPEG - 12.2 kb

Central banks around the world break their ties with the dollar as they purchase euros in an attempt to prevent losses stemming from the devaluation of the US currency, according to British experts.
Over two thirds of the world’s central banks increased their use of euros in the past two years, in particular at the expense of the US dollar, according to the Management Trends 2005 report, released by the London-based Central Banking Publications firm.

The poll, which was carried out from September to December and was sponsored by the Scottland Royal Bank, included top officials from 65 central banks controlling 1,7 trillion dollars.
The report, released during the last week of January, also revealed that more than half of all central banks consider the European currency and debt market as more attractive than the US ones in terms of investment.

The US dollar has reported falls in front of the euro almost every week since early November, with a slight stability in December.
However, the US currency is now facing its worst moment of the past 10 years if compared to other world currencies, such as the sterling pound, the Japanese yen, the Swiss franc, the Australian and Canadian dollars, as well as the Swedish and Danish crowns.

When the eurozone was set up in June 2002, the euro was hardly valued at 84 cents of a dollar. In September, it had gone up to 1,21.

The dollar fall is mainly due to the deficit of the US current account and, according to experts, it is a negative sign stemming from the image projected to the world by the economic policy led by the George W. Bush administration.
Bush took the huge 236.4- billion-dollar fiscal superavit, which he inherited from the Bill Clinton administration, up to 413 billion dollars.

Some economists anticipated a stampede from the US currency to the euro, which would jeopardize the role of the dollar as the reserve-currency prevailing in the world since 60 years ago, a period of time in which central banks have continuously accumulated US dollars.

The report by the Central Banking Publications Firm is the first concrete evidence that huge central banks are changing their course of action.
«Changing assets into dollars and not only into euros is an intelligent measure. Also intelligent is to purchase yens, gold or combinations of goods in order to be free from the dollar, which is over-valuated. In the end, a fall will take place, but the question is when?», said Mark Weisbrot, director of the Washington-based Center for Economic and Policy Research. China, which possesses the world’s largest dollar reserves after Japan, has announced that it will not get rid of them. However, representatives of central banks from many other nations showed themselves largely inclined to the euro. Finance Ministers in the Gulf countries decided to shift to the Euro late last year, while early this month the Central Bank of Saudi Arabia has foreseen a larger participation by the European currency in the world reserves.

This week’s report describes the weakness of the dollar as the main reason for a change in the composition of the central bank world reserves. «This would imply that some (central banks) will come up as exclusive dollar vendors. Such a fact sets a change in respect to the November 2002 previous study, when the currency reserve composition would look stable», reads the report.
Central banks will, to a certain extent, continue to finance the current US deficit by buying bonuses from the Treasury, but Washington can not count on that source of money as it did in the past, according to the study carried out by the Central Banking Publications. «Diversification running from goods in dollars to goods in euros seems to take place more rapidly than it was expected just two years ago», experts said. The tendency will seemingly keep going. Some economist argue that the US dollar must fall between 15 and 20 percent additionally in order to have the US deficit reach a reasonable level.
Most of these corrections will constitute currency purchases by Asian countries, which will force China to valuate the Yuan by 20 percent in respect to the dollar, according to C. Fred. Bergsten, director of the Washington-based International Institute of Economy (IIE). «It is no surprising that at least some central banks get alarm for they are so much exposed to the dollar», said Steve H. Hanke, professor of Applied Economics at the Johns Hopkins University and researcher of the liberal Cato Institute.
«Expectation aimed at some new diversification in central banks portfolios when the euro made its appearance, independently from other tendencies related to its value respect to the dollar and other similar issues», said Hanke. But the devaluation of the US dollar could turn into a great fall if panic invades private investors and such a fact would have an impact on central banks, economists warned.

For instance, if China and Japan decided to sell part of their huge dollar reserves, the currency would collapse much more than over the expected 20 percent limit. «The use of any drastic measure by the big players is quite difficult to foresee», Weisbrot warned. «China and Japan, or each of them separately, could cause the total collapse of the US dollar by selling just a small portion of their reserves. In fact, they do not have to do it, they only have to stop accumulating or slow the pace of their purchases so that the dollar starts its freefall», concluded Weisbrot.