Central banks shifting out of dollars, poll finds

Section:

By Chris Giles
Economics Editor
Financial Times, London
Monday, January 24, 2005
http://news.ft.com/cms/s/bd52ee06-6dad-11d9-ae0d-00000e2511c8.html

During the past few years the United States has become
dependent not so much on millions of investors around
the globe but on a few individuals in a few of the world's
central banks.

In 2003 the most recent year with full international
statistics, central banks financed 83 percent of the U.S.
current account deficit, with Asian central banks
accounting for 86 percent of flows.

A similar picture is emerging for 2004. Despite a good
start to the year, when the private sector was a large
net purchaser of dollar assets, central banks came to
the rescue again. The People's Bank of China has let
it be known that China increased dollar reserves by
$207 billion in 2004, financing nearly a third of the U.S.
current account deficit, estimated at $650 billion.

Self-interest has supported much of this flow of cash.
The United States has lapped up cheap finance to fund
its unquenchable appetite to spend. Asian governments
have until now been keen to oblige, in order to keep their
currencies from appreciating. But all investors have their
limits and they may start worrying about their degree of
exposure.

If new official flows to the United States were to be
curtailed, the dollar would plunge, creating a huge hole in
the accounts of central banks holding dollars.

"The risk exposure for Asian central banks is already
great," concluded Matthew Higgins and Thomas Klitgaard
of the Federal Reserve Bank of New York in a recent
paper.

In November, Alan Greenspan, U.S. Federal Reserve
chairman, suggested foreign investors would reach a limit
in their desire to finance the U.S. current account deficit
and diversify into other currencies or demand higher U.S.
interest rates, "elevating the cost of financing" the deficit
and "rendering it increasingly less tenable."

Until recently there had been little evidence to back up
these fears but this has begun to change. Members of
the Organisation of Petroleum Exporting Countries have
cut the proportion of deposits held in dollars from 75
percent to 61.5 per cent in the past three years.

The Bank of Thailand said this month it was considering
reducing the proportion of its $50 billion reserves held in
dollars from 80 percent to 50 percent. Russian officials
have made similar noises.

A detailed survey out today suggests that central banks
are increasingly moving official reserves out of the dollar
and into the euro.

Asian central banks are unlikely to pull the plug on dollar
assets altogether. But they may be close to ending their
willingness to provide cheap financing for an ever-increasing
U.S. current account deficit.

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