Central banks shunning the dollar?

Central Banking Publications released a survey in late January revealing that nearly 40 central banks have increased their exposure to the Euro in the past two years, mainly at the expense of the dollar (see “The Golden Goose Rule”).

The poll, which surveyed 65 central banks, also found that global central bank reserves were expected to rise to nearly$5 trillion by 2008 from $3.8 trillion in mid-2004.

The survey of official reserves managers controlling $1.7 trillion in assets was conducted between September and December 2004. It found 39 central banks reported an increase in their euro exposure while 29 reported a reduction in dollar exposure. Nine banks did not respond to this part of the poll.

Twenty-four of the banks said they had raised their exposure to sterling while 16 said they had cut their exposure to the yen. Analysts say the survey backs up market speculation that central banks are changing the composition of their currency reserves, mainly to the Euro’s advantage, although the survey did not quantify by how much central banks were buying euros or other alternatives to the dollar.

Of the 65 banks surveyed, 16 said they planned to maintain the same proportion of dollars in their reserves in 2005, while eight said they would raise the proportion of other currencies. At the end of 2003, central banks held 70 percent of their official reserves in dollar- denominated assets and central bank purchases of U.S. securities had financed more than 80 percent of the U.S. current account deficit in 2003. Any reluctance to increased exposure to dollar assets could further cause the greenback to plunge on currency markets.

Despite its recent rebound, the dollar has been in the doldrums in recent months as concerns over the U.S.’s twin deficits combined with talk that central banks around the world are reviewing the structure of their currency reserves away from the U.S. currency. The survey was sponsored by the Royal Bank of Scotland.