Peter Brimelow: Dollar bulls battle dollar bears

By Faisal Islam
The Observer, London
Sunday, February 22, 2004
a href=http://observer.guardian.co.uk/business/story/0,6903,1153155,00.htmlhttp...

Asian central banks are quietly moving away from holding
the U.S. dollar in their foreign exchange reserves, suggesting
further weakness in the value of the greenback this year.

A new analysis by Lehman Brothers estimates that in the last
half of last year as much as $133 billion of foreign exchange
reserves in non-Japan Asia left the dollar for stronger,
higher-yielding currencies such as the euro, pound, and
Australian dollar.

The research compared U.S. Treasury statistics on foreign
holders of its debt with Asian central banks' statistics on
reserve holdings.

quot;The dollar's now sharing its reserve currency status a little
-- perhaps not a bad thing,quot; says John Llewellyn, chief
economist at Lehmans.

Last week it was revealed that foreign exchange reserves
held by Asian countries had reached $2 trillion, as
governments overinsured against a currency crisis.

The bulk of this had been in dollars and dollar debt such
as U.S. treasuries. Asian central banks financed half of
the U.S. current account and fiscal deficits last year.

But diversifying reserves away from U.S. dollar assets,
which are low-yielding and becoming more risky, has
become compelling over the past year. Lehmans says its
research is quot;tentativequot; but consistent with the strength in
the euro and hints that the U.S. dollar has further to fall.

Other leading economists agree. quot;It was very clear in
2003 that these central banks did not buy anywhere as
much treasuries as they have accumulated forex reserves.
It was particularly marked in the second half of last year,quot;
said Jim O'Neill, head of economic research at Goldman
Sachs.

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