Forex Blog: Currency Trading News & Analysis.

June 24th 2005

Euro’s decline plaguing Central Banks

Asian Central Banks currently hold over $2 trillion Dollars in foreign exchange reserves, 70-75% of which are USD-denominated securities.  As the USD precipitously declined in value over the last few years, Central Banks lost tens of billions of dollars, in relative terms.  As a result, many began to ponder the diversification of their reserves into other major currencies, such as Euros or Yen. In fact, for the last year, many Central banks have begun to slow their purchases of US Treasury securities- without going so far as to sell existing securities. 

With all of the turmoil surrounding the Euro, Central Banks have begun to reevaluate this strategy.  Central banks are not "traders;" they are not concerned with short-term currency fluctuations.  What do concern them, however, are long-term trends such as the political uncertainty surrounding the future of the EU. While it is not likely that the EU will abandon the Euro, it is possible that certain nations will back out. And this presents a potential problem for Central Banks holding Euros. Dow Jones news reports:

And at the very least, the political turmoil in the E.U. has raised questions about whether the diverse, 25-nation group can efficiently manage a unified economy and a common currency. Because of the turmoil, central banks have turned "euro-neutral from euro-positive", the Tokyo foreign exchange dealer said.

Read More: Threats To Euro Could Slow Asia Reserves Diversification

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Posted by Adam Kritzer | in Central Banks, Euro, US Dollar | No Comments »

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