Ted Butler: Same as it ever was, only better

Section:

By Agence France-Presse
Monday, January 10, 2005

http://news.yahoo.com/news?
tmpl=story&u=/afp/20050110/ts_afp/eueurozoneecbbankeconomyforexeurores
ults_050110125804

FRANKFURT -- The weak dollar appears to be tearing
holes in the annual accounts of central banks both in
Europe and elsewhere around the world, with many
banks considering reducing their official holdings in
the US greenback.

The German business daily Handelsblatt reported that
the European Central Bank, which booked a 2003 loss
of 477 million euros ($625 million), saw its net loss
widen to at least one billion euros last year as a result
of the weak dollar.

The newspaper did not reveal its sources and said that
the guardian of the euro had refused to comment on
the information.

But already last week, the Bundesbank had conceded
that press reports were "more or less accurate" when
they claimed that the German central bank's annual
profit had been whittled down to next to nothing as a
result of the sharp fall in the value of the dollar.

Already in 2003, the Bundesbank saw its profit fall to
just 248 million euros in 2003, its lowest level in 17
years as a result of the weak dollar.

And because the Bundesbank holds vast reserves of
dollars, it was compelled to make heavy writedowns
against its holdings of the greenback again in 2004,
the reports said.

The ECB faces the same problem. The Handelsblatt
said in its Monday edition that the world's second
most powerful central bank, after the US Federal
Reserve, was compelled to make 1.6 billion euros in
writedowns against its dollar holdings.

Last year, the euro rose by 16 percent against the
dollar, representing an increase of more than 60
percent compared with the historic lows it posted in
autumn of 2000.

In addition, the ECB's earnings have dwindled
because of the low level of interest rates around the
world.

Central banks earn income from interest rates as well
as from its activities in gold, foreign currency, and
securities trading.

Handelsblatt said the low level of interest rates alone
knocked around 700 million euros off the ECB's net
interest income.

If the Handelsblatt figures are correct, it will be the third
annual loss posted by the ECB in the first few years of
its existence.

In addition to the loss in 2003, it also booked a shortfall
of 247.3 million euros in 1999.

According to data compiled by the International Monetary
Fund, the dollar accounted for nearly 64 percent of central
banks' foreign currency reserves worldwide at the end of
2003.

But the euro's role is strengthening -- it saw its share of
the world's foreign currency reserves rise from 16.3
percent at the end of 2000 to 19.7 percent at the end of
2003.

And that trend looks set to continue.

Russian central bank president Sergey Ignatiev said last
month that the Bank of Russia was considering changing
the composition of its gold and foreign currency reserves
to reduce its dollar holdings in favour of the euro.

Chinese authorities have embarked on a similar
restructuring of their foreign currency reserves, but have
not provided any concrete figures.

"The euro is under-represented" in international currency
reserves, considering the "economic weight of the
eurozone and the growing role of the euro in international
commerce," said Exane-BNP Paribas economist
Emmanuel Ferry.

Nevertheless, the dollar was still a long way from losing
its supremacy as the world's main international reserve
currency.

Central banks in Asia and South America were unlikely
to perform a U-turn in policy just because of the current
weakness of the dollar.

"They are not ordinary investors. They view things very
long-term. The euro is still too young a currency and
there are still too many uncertainties about the
functioning of European institutions and the future
perimetre of the eurozone," Ferry argued.

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