TOPICS : Central banks dump dollar for the euro

Emad Mekay:

Central banks around the world are getting rid of the US dollar in favour of the European currency, the euro, in a bid to stem losses from the declining greenback, an international survey says. The survey says that more than two-thirds of central banks have increased their exposure to the euro in the past two years, at the expense of the dollar.

Last Monday’s report also finds that over half of the central banks surveyed now regard euro-zone money and debt markets as being as attractive for investors as those of the United States. Titled “Management Trends 2005”, the report is published by the London-based Central Banking Publications Ltd. It surveyed reserve managers of 65 central banks, who control reserve assets worth 1.7 trillion dollars, between September and December 2004. The survey was sponsored by The Royal Bank of Scotland. Since early November, the dollar has hit record lows against the euro almost every week, with a brief lull last month. The greenback is now at 10-year lows against almost all other major traded currencies — the British pound, Japanese yen, Swiss franc, Australian dollar, Swedish kroner, Danish krona and Canadian dollar. A euro that cost only 84 cents in June 2002, and 1.21 dollars last September, now costs about 1.30 dollars. The decline is mainly powered by the current acco-unt deficit in the US, or the gap in trade in goods and services, returns and one-way financial transfers between the US and the rest of the world.

Analysts say the currency’s plunge is a sign of how negatively the world has come to view the debt-ridden fiscal policies of the George W. Bush administration, which drained much of the surplus it inherited from former president Bill Clinton.

It has turned a 236.4-billion-dollar surplus into a 413-billion-dollar deficit.

Some economists have predicted a stampede away from the dollar and to the euro. The oft-heard suggestion, which many economists appear to support, is that the drop could erode the dollar’s 60-year role as the world’s reserve currency.

Late last year, finance ministers from the oil-rich Gulf region said they may move to the euro, and earlier this month, the Saudi Central Bank governor predicted that the euro would play a greater role in global reserves in the future. The trend is likely to continue, with some economists arguing that the dollar needs to decline by another 15-20 per cent in order to cut the current account deficit to a reasonable level. Most of this correction should take place against Asian currencies, which will require China to revalue its exchange rate against the dollar by about 20 per cent, according to C. Fred Bergsten, director of the Institute of International Economics (IIE) in Washington. Because central banks have been accumulating dollars over a long period of time, the current decline of the US currency may not look that steep. If China and Japan, two countries with the biggest dollar reserves, decide to dump some of their dollar assets, the dollar is likely to completely collapse and go down far more than just the anticipated maximum of an extra 20 percent. “The timing of any drastic moves by big players is very hard to predict,” Weisbrot said.— IPS