Don’t put all your eggs in one basket

The question that many currency traders have been wondering about in recent months: Is the desire to reallocate central bank reserves a vote of no-confidence in U.S. economic or political policies — or perhaps just a desire to move away from the bear trend that has dominated the greenback since 2002? The answer is perhaps less dramatic.

Global central bank reserve managers ultimately attempt to implement the same type of portfolio theory in managing their country’s reserves as individuals do in saving for retirement. What’s the common thread? Diversification, of course.

What is the primary message from global central banks’ intentions to shift away a portion of their assets from dollar reserves?

“They are saying that the principle of diversification is important,” Fabbri says.

“Reallocation toward the euro, pound, and Swiss franc is just good portfolio management,” Buskas says.

“Central bank reserve managers not only manage risk, but seek to deliver a return.” Central banks have historically invested in low-risk, but also low-yielding assets, such as U.S. Treasury securities. Deterioration in the U.S. currency, however, can erode income earned from U.S. denominated investments.

“[However], the dollar is not losing its status as much as the euro is beginning to establish itself as more of a reserve currency,” HSBC’s Lynch says. As evidence, he points to a breakdown of the world’s foreign currency reserves at 65.4 percent U.S. dollar, 25.4 percent euro, 4.2 percent pound, 3.3 percent yen, and 1.5 percent in others.

“The dollar is still by far the world’s dominant reserve currency,” Lynch says. “But if global central banks diversify future incoming reserve flows into other currencies, the dollar is the one that ends up losing market share.”