Asian central banks seen gradually building up euro reserves

Asian central banks seen gradually building up euro reserves

Martin Abbugao, Agence France-Presse, Singapore

Major Asian central banks will continue to lift the proportion
of euros in their bulging reserves after it reached parity with
the dollar but analysts said the move would be gradual.

Nevertheless, the dollar will continue to be the dominant
currency in Asian reserves, reflecting the United States role as
Asia's dominant trading partner and expectations that the U.S.
economy will outperform Europe in the long run, they added.

Major Asian economies such as Japan, China, Taiwan, Hong Kong
and Singapore hold reserves larger than other major global
economies and can have a major impact on global currency markets.

For the first time in two years, the euro's value passed the
dollar this week but economists said there remains a wariness
about the underlying strength of the euro. Its recent advance has
been more due to dollar weakness -- reflecting a crisis of
confidence in corporate America -- rather than any inherent
strength in the euro.

Asian economies have been raising the euro portion of their
reserves since the unit was introduced in 1999 but they are
unlikely to desert the dollar, said Song Seng Wun, a Singapore-
based regional economist with GK Goh Research Pte. Ltd.

"I don't think they are going to switch immediately to make
the euro the dominant currency," he told AFP.

"The U.S. dollar is still the major global currency and it
will continue to be a major part of the overall portfolio. But at
the same time there will be gradual moves to raise euro reserves,
rather than sudden."

An unnamed foreign currency dealer in Taipei said Taiwan has
gradually raised its euro holdings to about 35 percent of total
reserves, up from 20 percent.

The U.S. dollar component fell from 65 percent to 50 percent,
the dealer said with Taiwan's foreign exchange reserves standing
at 148.24 billion dollars at end-June.

Economists estimate a third of Singapore's 80 billion dollar
reserves are held in euros, although like most other central
banks, the Monetary Authority of Singapore has kept the exact
proportion under wraps.

Wang Chunhong, spokeswoman for the State Administration of
Foreign Exchange in Shanghai, said China is likely to "make some
adjustment" to its foreign reserves composition.

Eddie Lee, a regional economist with DBS Vickers Securities in
Singapore, said any sudden switch by central banks would spark
instability in the financial markets.

"It will be gradual. I would not like to see it happen in the
immediate term because this would signal to the market that Asian
central banks are selling dollars.

"I don't think it's a wise move because that would seen as
shooting their own foot," he said.

Any further major decline in the dollar would affect the value
of reserves and add to emerging problems of Asian export
competitiveness being eroded as their currencies rise against the
U.S. dollar.

Peter Morgan, chief economist at HSBC Securities in Tokyo,
said the Bank of Japan may raise its weighting of euro reserves
slightly. But it also does not want to see the yen rise further
against the dollar and threaten Japan's export-led recovery.

"The last thing they want to do is push down the dollar
further because of their own actions," he said. "I think that
they would be fairly cautious about that."

Morgan estimates some 10 to 15 percent of the Bank of Japan's
foreign currency reserves -- the world's largest at $446.2
billion at the end of June -- are held in euros.

Most reserves are likely held in dollars, he said, as Japan
trades mostly with the U.S. and Asia with most foreign currency
transactions in dollars.

Some economists also doubted the sustainability of the euro's
gains.

"When you see the U.S. economy kicking back again, the dollar
will reflect that sentiment," GK Goh's Song said.

An economist with a major Asian bank, who did not want to be
named, said Europe "is not exactly a dynamic region", because it
is hobbled by rigid labor markets and states are burdened by
huge social security responsibilities.

He said EU's gross domestic product (GDP) growth rate for this
year is projected at only 1.5 percent, compared to forecast U.S.
growth of 3.5 to 3.75 percent.