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.