Forex Blog: Currency Trading News & Analysis.

July 30th 2007

Dollar Threatened by Domestic Diversification

Most Dollar bulls cringe when they hear the word “diversification.” Within the context of forex, diversification usually refers to the shift towards non-Dollar denominated assets among Central Banks.  The thinking is that with the declining Dollar, it probably makes sense to hold reserves in non-US investments.  However, analysts have begun to realize that this only represents a small segment of entities that could harm the Dollar by diversifying.  The world’s Central Banks probably hold at most $5 Trillion of reserves, whereas US institutional investment funds probably have over $20 Trillion collectively invested in US assets.  Thus, diversification in this segment probably poses a much greater threat to the long term health of the USD.  The Economist reports:

American mutual funds have gradually increased their overseas allocation of equities since 2003 from 15% to 22.5% of assets. If this portfolio shift mirrors the behavior of all pension, insurance and mutual fund managers, it would imply an outflow from dollar assets of $1.16 trillion since 2003.

Read More: Soft currency

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

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