It is only a matter to time now; days, weeks, months. The smoke signals are billowing, the war drums are growing louder and louder. From the Asian Times:
Central banks dump dollar for euro
By Emad Mekay
WASHINGTON - Central banks around the world are getting rid of the US dollar in favor of the euro in a bid to stem losses from the declining greenback, an international survey reveals. The survey says that more than two-thirds of central banks have increased their exposure to the euro in the past two years, mainly at the expense of the dollar. The report also finds that over half the central banks surveyed now find euro-zone money and debt markets as attractive for investors as those of the United States.
Titled "Management Trends 2005", the report was published by the London-based Central Banking Publications Ltd. It surveyed 65 central bank reserve managers who control reserve assets worth $1.7 trillion, between September and December 2004. The survey was sponsored by the Royal Bank of Scotland.
Since early November, the dollar has hit record lows against the euro almost every week, with a brief lull last month. The greenback is now at 10-year lows against almost all other major traded currencies - the British pound, Japanese yen, Swiss franc, Australian dollar, Swedish krona, Danish krone and Canadian dollar. A euro that cost only 84 cents in June 2002, and $1.21 last September, now costs about $1.30.
The decline is mainly powered by the US current account deficit, or the gap in trade in goods and services, investment returns and one-way financial transfers between the United States and the rest of the world. Analysts say the currency's plunge is also a sign of how negatively the world has come to view the central bank reserve managers who control reserve assets worth $1.7 trillion, between September and December 2004. The survey was sponsored by the Royal Bank of Scotland.
Since early November, the dollar has hit record lows against the euro almost every week, with a brief lull last month. The greenback is now at 10-year lows against almost all other major traded currencies - the British pound, Japanese yen, Swiss franc, Australian dollar, Swedish krona, Danish krone and Canadian dollar. A euro that cost only 84 cents in June 2002, and $1.21 last September, now costs about $1.30.
The decline is mainly powered by the US current account deficit, or the gap in trade in goods and services, investment returns and one-way financial transfers between the United States and the rest of the world. Analysts say the currency's plunge is also a sign of how negatively the world has come to view the debt-ridden fiscal policies of the George W Bush administration, which has drained much of the surplus it inherited from the Clinton coffers. The current administration has turned a $236.4 billion surplus into a $413 billion deficit.
Some economists have predicted a stampede away from the dollar and to the euro. The oft-heard suggestion, which many appear to support, is that the drop could erode the dollar's 60-year role as the world's reserve currency. The report, released on Monday, is the first concrete evidence that major central banks are indeed taking that step. "It's a smart move on their part to move not just to the euro, they can also buy the yen. They can even buy gold or move to a whole mix of assets to get away from the dollar, which is overvalued," said Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington. "It's going to have to fall eventually. The question is when."
While central banks will continue to some extent to finance the US current account deficit through buying US securities, the United States cannot rely on this source of financing to the same extent as in the past, said the survey. "Diversification from dollar-denominated to euro-denominated assets appears to be taking place more rapidly than had been anticipated two years ago," it said.
The trend is likely to continue, with some economists arguing that the dollar needs to decline by another 15-20% in order to cut the current account deficit to a reasonable level. Most of this correction should take place against Asian currencies, which will require China to revalue its exchange rate against the dollar by about 20%, according to C Fred Bergsten, director of the Institute of International Economics (IIE) in Washington.
Because central banks have been accumulating dollars over a long period, the current decline may not look that steep. "It doesn't particularly surprise me that at least some central banks are unloading their dollar holdings," said Steve H Hanke, a professor of applied economics at Johns Hopkins University and senior fellow at the Cato Institute in Washington. "The expectation was that as soon as the euro currency came out, there would be some diversification in central banks' portfolios, independent of the trends in the euro value versus the dollar and things like that."
Most of this correction should take place against Asian currencies, which will require China to revalue its exchange rate against the dollar by about 20%, according to C Fred Bergsten, director of the Institute of International Economics (IIE) in Washington.
Because central banks have been accumulating dollars over a long period, the current decline may not look that steep. "It doesn't particularly surprise me that at least some central banks are unloading their dollar holdings," said Steve H Hanke, a professor of applied economics at Johns Hopkins University and senior fellow at the Cato Institute in Washington. "The expectation was that as soon as the euro currency came out, there would be some diversification in central banks' portfolios, independent of the trends in the euro value versus the dollar and things like that."
But the fall could quickly turn into a major plunge if panic spreads among private investors and moves on to infect central banks, some economists say. If China and Japan, two countries with the biggest dollar reserves, decide even to dump some of their dollar assets, the dollar is likely to collapse completely and go down far more than just the anticipated maximum of an extra 20%. "The timing of any drastic move by big players is very hard to predict," Weisbrot said. "China and Japan for example, either one of those, can cause a complete crash, a total collapse of the dollar just by selling a small portion of their reserves. In fact, probably they won't have to sell their reserves, all they have to do is stop accumulating or slow down their rate of accumulation and it will be a dollar crash."
(Inter Press Service)
Jan 27
http://www.atimes.com/atimes/Global_Economy/GA27Dj01.html
