Emerging Markets’ Euro Holdings At 11-Year Low: Report
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Central banks in developing countries sold nearly 45 billion euros in currency holdings last year, reported the Financial Times on Monday, highlighting the damage Europe’s sovereign debt crisis has done to the Euro’s international standing, even as the U.S. dollar held steady.
According to FT, Euros now made up only 24 percent of emerging nations’ reserves, the lowest since 2002, while USD holdings managed to stay at about 60 percent.
Central banks in developing countries sold nearly 45 billion euros in currency holdings last year, reported the Financial Times on Monday, highlighting the damage Europe’s sovereign debt crisis has done to the Euro’s international standing, even as the U.S. dollar held steady.
According to FT, Euros now made up only 24 percent of emerging nations’ reserves, the lowest since 2002, while USD holdings managed to stay at about 60 percent.
The choice of where to hold reserves sends a clear signal of which currencies developing countries regard as the most stable, safe and liquid, said FT, adding that holdings of the Euro had been cut by 8 percent last year.
Edwin Truman, senior fellow at the Peterson Institute think-tank in Washington, told FT that “the effects of the euro crisis will linger, growth will be slow, interest rates will remain low, and the general attractiveness of euro assets low.”
Truman suggested that while “the dollar is holding its own for now… we are moving towards a multicurrency system.”
This shift in particular is highlighted by the growing internationalisation of the renminbi, said Truman. Just last week, China and Brazil signed a $30 billion swap deal so each can borrow the other’s currency in the event of turmoil in the international financial system. The yuan also overtook the Russian ruble for transactions in the global payment system for the first time in January, according to the Society for Worldwide Interbank Financial Telecommunications.
Analysts have predicted that the Chinese government may float the yuan on international markets sometime within the next five years, in order to expedite its use as a global currency.
[quote]“To become a global currency requires full convertibility,” said HSBC economists Qu Hongbin, Sun Junwei, Paul Mackel and Wang Ju in a research report, cited by the International Business Times. “Although this will be done gradually, Beijing policy makers are now more confident than ever about speeding up the process.”[/quote]Related: China Likely To Float Yuan In Five Years
Related: Is the RMB Displacing the USD in Asia?: Michael Pettis
Related: China Says Move Beyond the US Dollar, Calls for a New Super-Sovereign Currency
Karl Schamotta, a senior market strategist at Western Union Business Solutions, further highlighted that as long as China’s GDP growth stays above global growth, central bank reserves would increase their share of yuan holdings, in anticipation of it becoming an international reserve currency.
That day is, however, still “a long way off,” Schamotta said.
[quote]“The Chinese yuan is clearly on the path towards becoming a global trade currency, but the country’s closed capital account prevents it from becoming a reserve currency.”[/quote]The U.S. dollar has dominated the global financial system since the Bretton Woods agreement in 1944. Jeffrey Frankel, professor of economics at Harvard’s Kennedy School of Government, said that the latest figures for the Euro will be damning for European leaders who dream of taking on the dollar as the leading international currency.
“It’ll be the number two international currency but I wouldn’t say there are any prospects of it challenging the dollar,” Frankel told FT.
[quote]”The degree of integration across European financial markets has (now) taken a step back,” he added. “That is the dimension on which the euro has lost ground in international currency status.”[/quote]Related: The Almighty Dollar – Are We Entering A Post-USD World? : Sanjeev Sanyal
Related: Currency Wars: Will the dollar, euro, yen or yuan prevail in 2012?
