Agence France Presse

Frankfurt, January 10:

The weak dollar appears to be tearing holes in the annual accounts of central banks both in Europe and elsewhere around the world, press reports suggested today, and many of the banks are considering reducing their official holdings in the US greenback.

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

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 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 stated. The ECB faces the same problem.

The Handelsblatt reported 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 per cent against the dollar, representing an increase of more than 60 per cent 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 reported the low level of interest rates alone knocked around 700 million euros off the ECB’s net interest income. 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 IMF, the dollar accounted for nearly 64 per cent 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 per cent at the end of 2000 to 19.7 per cent at the end of 2003.