Central bank currency riggers buy dollars sold by central bank investment arms

By Gertrude Chavez-Dreyfuss
Reuters
Monday, March 31, 2008

http://in.reuters.com/article/asiaCompanyAndMarkets/idINN314161642008033...

NEW YORK -- Global central banks' currency reserves rose at the end of the fourth quarter, while the dollar's share of these holdings edged up despite claims of steady diversification away from dollar assets.

Data from the International Monetary Fund released on Monday, which covers about two-thirds of the world's foreign exchange reserves, showed that currency holdings rose to $6.391 trillion in the fourth quarter, up around 6 percent from the previous three months. Total allocated reserves also increased to $4.065 trillion.

Dollar reserves were at a record $2.6 trillion, or 63.9 percent of the total allocated reserves, up marginally from 63.8 percent in the previous quarter, but down from 65.4 percent a year earlier.

Quarterly data are available only as far back as 1999, but the last time the dollar's share fell this low on an annual basis was 1996, when it stood at 62.1 percent.

The euro's share of allocated reserves marginally rose to 26.5 percent in the fourth quarter, from 26.4 in the third. The fourth quarter figure was up from 25.4 percent a year ago, which analysts say, was a modest gain given how sharp the euro's rise had been against the dollar in that period.

"The data, when accounting for valuation effects, would further suggest that reserve diversification ground to a halt in the fourth quarter despite all the talk of such activity," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Sterling's allocation in the fourth quarter was at 4.7 percent, little changed from the previous quarter, while global central banks allocated just 0.5 percent to the Swiss franc, the other "flight to quality" recipient.

"The best explanation for this apparent lack of diversification is that the investment arm of central banks selling dollars ... has ... been offset by the wing of the central bank that has a foreign exchange objective (through a quasi/loose dollar peg) that has been buying dollars back in a weak dollar environment," said Ruskin.

Central banks also increased their allocation of yen to $118.6 billion, or nearly 3 percent from $105.4 billion the previous quarter, from 2.7 percent.

Global reserves have increased every quarter since the first quarter of 2001 and the pace of accumulation has accelerated over the last five years. The accumulation of reserves, much of which is invested in U.S. debt markets, has mirrored rising current account deficits in the United States.

The IMF data is closely watched since speculation has risen in recent years that central banks may be looking to reduce the heavy weight of the dollar in their foreign exchange holdings to minimize exposure to the greenback's declines.

So far, however, the evidence of a significant shift has been patchy. Although the dollar's share has dropped from around 71 percent in 1999, the year the euro was launched, it has remained relatively stable over the past four years.

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