More efforts to talk the dollar up and the euro down


By Joshua Krongold
Bloomberg News Service
Monday, January 24, 2005

NEW YORK -- Central banks are reducing their holdings of
dollars in favor of the euro, according to a survey of 65
central banks, extending a three-year trend identified by
the International Monetary Fund.

Almost 70 percent of the 56 central banks that provided
details of changes in their reserves said they boosted
holdings of the 12-nation currency, according to the survey
sponsored by Royal Bank of Scotland Group Plc. Fifty-two
percent said they reduced the share of dollar holdings.
Nine central banks either reported no change or didn't
answer the question.

The dollar lost 7 percent against the euro in the fourth
quarter, falling to a record $1.3666 on Dec. 30. The
currency's three-year decline may spur central banks to
pare the proportion of their reserves held in dollars and
make it harder to finance the U.S. current-account deficit,
said Robert Pringle and Nick Carver, authors of a report
on the survey's conclusions.

"The overwhelming trend we've seen is increasing
exposure to the euro," said Carver, an assistant editor at
Central Banking Publications Ltd., the London-based
publisher that conducted the survey. "Central banks have
started to take the euro more seriously."

Royal Bank of Scotland is the ninth-largest foreign-exchange
trader, according to a 2004 Euromoney survey, accounting
for 3.5 percent of the $1.9 trillion-a-day currency market.

The dollar fell to $1.3089 per euro as of 11:15 a.m. in London,
after gaining 0.6 percent last week, according to EBS, an
electronic trading system. The U.S. currency was at 102.87
yen, after advancing 0.7 percent last week to 102.70.

The survey "is reminding people that the U.S. does have a
funding problem in its current account and reinforces the
views of dollar bears," said Marvin Barth, a currency
strategist at Citigroup Inc. in London and a former Federal
Reserve employee. "This is very much a longer-term issue."

The share of dollars in total reserve holdings was 63.8
percent at the end of 2003 from 63.5 percent in 2002 and
down from 66.9 percent in 2001, the IMF said in its annual
report in April 2004. The euro proportion rose to 19.7
percent from 19.3 percent in 2002 and 16.7 percent in 2001.

Central banks may trim the proportion of reserves held in
dollars to about 60 percent in coming years, said Barth.

The dollar, up about 3.5 percent this month, may in 2005
end a three-year decline against the euro, according to a
Bloomberg survey of 53 traders, strategists, and investors
published on Jan. 7. Forty-eight percent of people
questioned separately on Jan. 21 advised buying the
dollar against the euro this week, up from 40 percent a
week earlier.

The dollar lost more than six cents against the euro between
Nov. 19 and the end of 2004 after Fed Chairman Alan
Greenspan told the European Banking Congress in
Frankfurt that foreign investors will tire of financing the
current account deficit and channel their money into other

"While central banks will continue to some extent to
finance the American current-account deficit, the United
States cannot rely on this source of finance to the same
extent as in the past," Pringle and Carver wrote.

The deficit in the current account, the broadest measure
of international trade, rose to a record $164.7 billion in the
third quarter. To compensate for the gap and maintain the
value of the dollar, the United States needs to attract about
$1.8 billion a day, or about $55 billion a month, based on
Bloomberg calculations.

The dollar fell against the euro on Nov. 23 after Russian
Central Bank First Deputy Chairman Alexei Ulyukayev
said the country may lift the amount of euros in its

"Most of our reserves are in dollars and that's a cause for
concern," Ulyukayev told reporters in Moscow the same
day. "It's a real problem. Looking at the dynamics of the
euro-dollar rate, we are discussing the possibility to
change the reserve structure."

More than half of those polled said they've decreased the
portion of dollar holdings in about the past two years.
Twenty-seven percent said they've done the opposite.
Twenty-nine percent said they cut the share of reserves
held in yen and 11 percent said they increased it. Forty
percent stepped up accumulation of British pounds.

The survey doesn't provide an estimate of the total
proportion of reserves held in any currency. Carver
declined to identify any of the central banks questioned.


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