US Dollar Losing Its Position
As Asia's Reserve Currency
By John Garnaut

North-East Asian central banks have turned away from US dollar foreign exchange reserves, accelerating the US dollar's fall and boosting the euro's claim to become the world's second reserve currency.
Westpac's currency strategist, Robert Rennie, said the euro's surge through the $US1 barrier on Monday night was propelled in part by buying from North-East Asia.
A report by Mr Rennie shows the central banks of China, Taiwan, Hong Kong and South Korea accumulated an "unprecedented" $US66 billion ($117 billion) in foreign reserves in the first six months of this year, but they did not spend those reserves on US dollar assets.
Last year, the North-East Asian central banks funded more than 20 per cent of the US current account deficit, but that pattern began to break down in the first quarter of this year.
China became a net seller of US government bonds in April for the first time since August 2000. Hong Kong's purchases of US securities have dropped to their lowest levels since March 2000 and Taiwan, which has traditionally spent close to 100 per cent of its reserves on US securities, has recently seen its reserves blow out by $20 billion but its net purchases of US securities drop towards zero.
"There's been a lot of anecdotal and official data to suggest that North-East Asian central banks are significantly shifting currency reserve assets to include more euro," Mr Rennie said. "The fact that the euro area saw an unusual capital inflow to the tune of *11 billion ($20 billion) in April, while the US saw its largest month of net selling of securities from North-East Asia since October 1997 should not be lost on the foreign exchange markets. This is especially true since April saw the euro propelled to six-month highs."
In addition, traders said that North-East Asian central banks had increased their holdings of Australian dollar assets. The People's Bank of China, the central bank, is known to have been a significant buyer in Australian markets this year.
The four central banks have accumulated massive foreign reserves because of growing trade surpluses and unprecedented inflows of foreign direct investment (particularly to China). This had produced a "natural pressure for exchange rates to accelerate", NAB strategist Michael Jansen said.
But in order to prevent their exchange rates from rising, which would lower export competitiveness and investment attractiveness,each of the four central banks have linked their exchange rates to the US dollar. To hold the currencies down they have been forced to purchase large reserves of foreign exchange.
The euro enjoyed its freedom yesterday on the other side of the $US1 fence, buying US100.55c at the local close. The dollar was unchanged at US56.19c


This Site Served by TheHostPros