The dollar’s supremacy in the foreign exchange market was affirmed by official data on Tuesday, showing an increase among the currency reserves of central banks, while the euro’s share declined.
Quarterly data from the International Monetary Fund revealed the dollar’s share rising from 62.4 per cent in the third quarter of 2014, to 62.9 per cent by the end of the fourth quarter.
Further gains for the dollar are expected given the strong performance of the world’s reserve currency since January. The past three months has been marked by a surge in demand for the dollar, the start of quantitative easing in the eurozone and the Swiss Central Bank’s dramatic abandonment of its peg to the euro.
As the first three months of the year drew to a close on Tuesday, the euro was set for its steepest quarterly drop against the US dollar since the launch of the single currency in 1999.
The IMF’s report on the currency composition of official foreign exchange reserves, known as Cofer data saw the euro’s share of currency reserves fall from 22.6 per cent to 22.2 per cent for the final three months of 2014. On a year-by-year basis, reserve holdings in euros declined by 11 per cent and the gap in reserves held in the world’s two biggest currencies is expected to widen when the next Cofer data are published in June.
Alan Ruskin of Deutsche Bank said he expected Cofer first quarter data to show holdings in the euro down to below 20 per cent, while the dollar’s share should rise to 65 per cent.
The fourth quarter data suggested central banks were not especially active in buying the dollar and selling the euro, once valuations were taken into account, said Mr Ruskin.
“Instead they have passively accepted the valuation effects on their portfolio that are propelling the dollar’s share up, and the euro’s share down,” he said.
Holdings in the Japanese yen dropped by only $3.4bn, a size of fall that surprised Steven Englander, global head of FX strategy at Citigroup.
“Given how much the yen dropped, that level should be much lower, so it looks as if some central banks were buying,” he said.
Tuesday saw the dollar resume its downward pressure on the euro, bolstered by a report showing stronger US consumer confidence. There were signs of a euro recovery against the dollar at various stages in the past week, but the dollar rally appears to have resumed ahead of the monthly employment data due on Friday.
Although the euro remains above the 12-year low of $1.046 reached on March 16, most strategists believe further selling of the single currency is likely.
For one thing, the European Central Bank’s €60bn-a-month bond buying programme is having the effect of weakening the euro and easing deflation in the eurozone.
The diverging monetary policies between the Federal Reserve and the ECB have prompted a number of currency strategists to call for the euro-dollar pair to go to parity later this year or early in 2016.
Sireen Harajli, FX strategist at Mizuho Bank, said: “Shaky eurozone fundamentals, tight credit conditions and an aggressive ECB have set the backdrop for the downtrend in the euro.
“This first quarter’s decline, and the prospect of the euro remaining weak, will cheer the ECB as well as eurozone companies exporting to the US.”