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Categorized | Currencies

Central banks reduce euro holdings in Q1

Posted on June 29, 2012

Central banks reduced their holdings of the euro in the first quarter of the year despite a period of relative calm for the eurozone, in the latest sign that global reserve managers have become more cautious on Europe.

Global reserve managers cut euro holdings and added Japanese yen, British pounds and Swiss francs in the first three months of the year, according to an analysis of quarterly figures from the International Monetary Fund.

    Total foreign exchange reserves rose by 2.2 per cent from $10.2bn to $10.4bn, marking the biggest quarterly rise since the second quarter of last year.

    Just 55 per cent of reserves are reported in the IMF’s Composition of Foreign Exchange (Cofer) data – with China notably absent.

    Holdings of the euro dipped from 25 per cent to 24.9 per cent of reported reserves. Adjusting for valuation effects, euro holdings fell 2 per cent during the period, according to an analysis by Citibank.

    “The euro selling confirms indications of growing concern among reserve managers that the euro crisis is unlikely to be resolved as easily as advertised,” said Steven Englander, head of foreign exchange strategy at Citibank.

    Central bank reserve managers can be significant movers of the $4tn-a-day currency markets. Investment bankers say the group can account for well over a quarter of daily flows when they choose to be active in the market.

    Holdings of “other” currencies during the quarter – including the Australian and Canadian dollars – also fell, bucking a recent trend for central banks to move more of their assets into less liquid currencies.

    Holdings of the Japanese yen, at just less than 2 per cent of total reported reserves, rose more than 7 per cent after adjusting for valuations.

    “The yen is not a preferred holding and has been going down over the years – it shows how desperate reserve managers are for safe havens,” said Mr Englander at Citi.

    However, euro reserve growth was still up on an annual basis when compared with the first quarter of 2011. Analysts at Deutsche Bank calculated that euro reserves were 7 per cent higher on an annualised basis while US dollar reserves rose 9 per cent, accounting for valuation changes.

    “The data suggests that central bank selling of the euro had as of the first quarter yet to become a major euro negative factor, even if central banks equally are not acting as a counterweight to private sector selling,” noted Alan Ruskin, foreign currency strategist at Deutsche Bank.