Central Banks Shift Reserves away from US

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> Financial Times
>
> Central banks shift reserves away from US By Chris Giles Published:
> January 24 2005 00:03 | Last updated: January 24 2005 00:03 Central
> banks are shifting reserves away from the US and towards the eurozone
> in a move that looks set to deepen the Bush administration's
> difficulties in financing its ballooning current account deficit.
>
> In actions likely to undermine the dollar's value on currency
> markets, 70 per cent of central bank reserve managers said they had
> increased their exposure to the euro over the past two years. The
> majority thought eurozone money and debt markets were as attractive a
> destination for investment as the US.
>
> The findings emerge from a survey of central bank reserve managers
> published today and conducted between September and December of last
> year. About 65 central banks, controlling assets worth $1,700bn, took
> part and the results showed a marked change in attitude over the past
> two years.
>
> Any rebalancing of central bank reserve portfolios has serious
> implications for the global financial system as the US has become
> increasingly dependent on official flows of funds to finance its
> current account deficit, estimated at $650bn in 2004.
>
> At the end of 2003,central banks held 70 per cent of their official
> reserves in dollar-denominated assets and central bank purchases of
> US securities had financed more than 80 per cent of the US current
> account deficit in 2003.
>
> Any reluctance to increase exposure to dollar assets further could
> cause the greenback to plunge on currency markets.
>
> "The US cannot take support for the dollar for granted," said Nick
> Carver, one of the authors of the study conducted by Central Banking
> Publications, a company that specialises in reporting on
>
> "Central banks' enthusiasm for the dollar seem to be cooling off."
>
> In a further worrying sign for the greenback, 47 per cent of reserve
> managers surveyed said they expected the growth of official reserves
> to slow to less than 20 per cent over the next four years. Between
> the end of 2000 and mid-2004, official reserves had increased by 66
> per cent.
>
> Slower reserve accumulation growth implies the supply of official
> finance is likely to become more limited but few expect the demand
> from the US for finance to slow. The consensus among economists is
> that the US current account deficit will increase to $694bn in 2005.
>
> More than 90p er cent of central bank reserve managers said that the
> income from reserve management was "important" or "very important".
>
> In the two years since a similar survey was conducted, reserve
> managers had begun to seek higher returns for the money under
> management.

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