|Dollar Reaches Breaking Point as Banks Shift Reserves
By Ye Xie and Anchalee Worrachate
Oct. 12 (Bloomberg) -- CENTRAL BANKS FLUSH WITH record reserves are
increasingly snubbing dollars in favor of euros and yen, further pressuring
the greenback after its biggest two- quarter rout in almost two decades.
Policy makers boosted foreign currency holdings by $413 billion last
quarter, the most since at least 2003, to $7.3 trillion, according to data
compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent
of the new cash into euros and yen in April, May and June, the latest
Barclays Capital data show. That’s the highest percentage in any quarter
with more than an $80 billion increase.
World leaders are acting on threats to dump the dollar while the Obama
administration shows a willingness to tolerate a weaker currency in an
effort to boost exports and the economy as long as it doesn’t drive away the
nation’s creditors. The diversification signals that the currency won’t
rebound anytime soon after losing 10.3 percent on a trade-weighted basis the
past six months, the biggest drop since 1991.
“Global central banks are getting more serious about diversification,
whereas in the past they used to just talk about it,” said Steven Englander,
a former Federal Reserve researcher who is now the chief U.S. currency
strategist at Barclays in New York. “It looks like they are really backing
away from the dollar.”
The dollar’s 37 percent share of new reserves fell from about a 63 percent
average since 1999. Englander concluded in a report that the trend
“accelerated” in the third quarter. He said in an interview that “for the
next couple of months, the forces are still in place” for continued
America’s currency has been under siege as the Treasury sells a record
amount of debt to finance a budget deficit that totaled $1.4 trillion in
fiscal 2009 ended Sept. 30.
Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s
performance against the euro, yen, pound, Canadian dollar, Swiss franc and
Swedish krona, fell to 75.77 last week, the lowest level since August 2008
and down from the high this year of 89.624 on March 4. The index, at 76.104
today, is within six points of its record low reached in March 2008.
Foreign companies and officials are starting to say their economies are
getting hurt because of the dollar’s weakness.
Yukitoshi Funo, executive vice president of Toyota City, Japan-based Toyota
Motor Corp., the nation’s biggest automaker, called the yen’s strength
“painful.” Fabrice Bregier, chief operating officer of Toulouse,
France-based Airbus SAS, the world’s largest commercial planemaker, said on
Oct. 8 the euro’s 11 percent rise since April was “challenging.”
The economies of both Japan and Europe depend on exports that get more
expensive whenever the greenback slumps. European Central Bank President
Jean-Claude Trichet said in Venice on Oct. 8 that U.S. policy makers’
preference for a strong dollar is “extremely important in the present
“Major reserve-currency issuing countries should take into account and
balance the implications of their monetary policies for both their own
economies and the world economy with a view to upholding stability of
international financial markets,” China President Hu Jintao told the Group
of 20 leaders in Pittsburgh on Sept. 25, according to an English translation
of his prepared remarks. China is America’s largest creditor.
Developing countries have likely sold about $30 billion for euros, yen and
other currencies each month since March, according to strategists at Bank of
That helped reduce the dollar’s weight at central banks that report currency
holdings to 62.8 percent as of June 30, the lowest on record, the latest
International Monetary Fund data show. The quarter’s 2.2 percentage point
decline was the biggest since falling 2.5 percentage points to 69.1 percent
in the period ended June 30, 2002.
“The diversification out of the dollar will accelerate,” said Fabrizio
Fiorini, a money manager who helps oversee $12 billion at Aletti Gestielle
SGR SpA in Milan. “People are buying the euro not because they want that
currency, but because they want to get rid of the dollar. In the long run,
the U.S. will not be the same powerful country that it once was.”
Central banks’ moves away from the dollar are a temporary trend that will
reverse once the Fed starts raising interest rates from near zero, according
to Christoph Kind, who helps manage $20 billion as head of asset allocation
at Frankfurt Trust in Germany.
‘Flush’ With Dollars
“The world is currently flush with the U.S. dollar, which is available at no
cost,” Kind said. “If there’s a turnaround in U.S. monetary policy, there
will be a change of perception about the dollar as a reserve currency. The
diversification has more to do with reduction of concentration risks rather
than a dim view of the U.S. or its currency.”
The median forecast in a Bloomberg survey of 54 economists is for the Fed to
lift its target rate for overnight loans between banks to 1.25 percent by
the end of 2010. The European Central Bank will boost its benchmark a half
percentage point to 1.5 percent, a separate poll shows.
America’s economy will grow 2.4 percent in 2010, compared with 0.95 percent
in the euro-zone, and 1 percent in Japan, median predictions show. Japan is
seen keeping its rate at 0.1 percent through 2010.
Central bank diversification is helping push the relative worth of the euro
and the yen above what differences in interest rates, cost of living and
other data indicate they should be. The euro is 16 percent more expensive
than its fair value of $1.22, according to economic models used by Credit
Suisse Group AG. Morgan Stanley says the yen is 10 percent overvalued.
Reminders of 1995
Sentiment toward the dollar reminds John Taylor, chairman of New York-based
FX Concepts Inc., the world’s largest currency hedge fund, of the mid-1990s.
That’s when the greenback tumbled to a post-World War II low of 79.75
against the yen on April 19, 1995, on concern that the Fed wasn’t raising
rates fast enough to contain inflation. Like now, speculation about central
bank diversification and the demise of the dollar’s primacy rose.
The currency then gained 26 percent versus the yen and 25 percent against
the deutsche mark in the following two years as technology innovation
increased U.S. productivity and attracted foreign capital.
“People didn’t like the dollar in 1995,” said Taylor, whose firm has $9
billion under management. “That was very stupid and turned out to be wrong.
Now, we are getting to the point that people’s attitude toward the dollar
becomes ridiculously negative.”
The median estimate of more than 40 economists and strategists is for the
dollar to end the year little changed at $1.47 per euro, and appreciate to
92 yen, from 89.97 today.
Englander at London-based Barclays, the world’s third- largest
foreign-exchange trader, predicts the U.S. currency will weaken 3.3 percent
against the euro to $1.52 in three months. He advised in March, when the
dollar peaked this year, to sell the currency. Standard Chartered, the most
accurate dollar-euro forecaster in Bloomberg surveys for the six quarters
that ended June 30, sees the greenback declining to $1.55 by year-end.
The dollar’s reduced share of new reserves is also a reflection of U.S.
assets’ lagging performance as the country struggles to recover from the
worst recession since World War II.
Since Jan. 1, 61 of 82 country equity indexes tracked by Bloomberg have
outperformed the Standard & Poor’s 500 Index of U.S. stocks, which has
gained 18.6 percent. That compares with 70.6 percent for Brazil’s Bovespa
Stock Index and 49.4 percent for Hong Kong’s Hang Seng Index.
Treasuries have lost 2.4 percent, after reinvested interest, versus a return
of 27.4 percent in emerging economies’ dollar- denominated bonds, Merrill
Lynch & Co. indexes show.
The growth of global reserves is accelerating, with Taiwan’s and South Korea’s,
the fifth- and sixth-largest in the world, rising 2.1 percent to $332.2
billion and 3.6 percent to $254.3 billion in September, the fastest since
May. The four biggest pools of reserves are held by China, Japan, Russia and
China, which controlled $2.1 trillion in foreign reserves as of June 30 and
owns $800 billion of U.S. debt, is among the countries that don’t report
“Unless you think China does things significantly differently from others,”
the anti-dollar trend is unmistakable, Englander said.
Follow the Money
Englander’s conclusions are based on IMF data from central banks that report
their currency allocations, which account for 63 percent of total global
reserves. Barclays adjusted the IMF data for changes in exchange rates after
the reserves were amassed to get an accurate snapshot of allocations at the
time they were acquired.
Investors can make money by following central banks’ moves, according to
Barclays, which created a trading model that flashes signals to buy or sell
the dollar based on global reserve shifts and other variables. Each trade
triggered by the system has average returns of more than 1 percent.
Bill Gross, who runs the $186 billion Pimco Total Return Fund, the world’s
largest bond fund, said in June that dollar investors should diversify
before central banks do the same on concern that the U.S.’s budget deficit
“The world is changing, and the dollar is losing its status,” said Aletti
Gestielle’s Fiorini. “If you have a 5- year or 10-year view about the
dollar, it should be for a weaker currency.”