Keep an eye on…

Posted by Scriptaty | 7:50 PM

Central bank reserve diversification may top currency traders’ items of hot issues to monitor into 2007. Central banks have begun to diversify away from U.S. dollar assets and into currencies such as the euro and pound.

In early November, the Chinese central bank governor Zhou Xiaochuan said the country plans to diversify its $1 trillion of foreign exchange reserves, which is the world’s largest forex reserve. His comments triggered immediate bearish reactions in the U.S. dollar and U.S. bond markets when they were released.

“Over the second half of 2006 there has been a long stream of central bank officials talking about how they will diversify their portfolios,” Buskas says. “It has run the gamut from the Italians to Middle East central banks and, most recently, the Chinese central bank.

“If we continue to see that kind of talk, it might become the dominant play in 2007. The yield play has run its course and, increasingly, the diversification story will be the top driver for the FX market in 2007.”

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