BI holds off on adding euro to reserves

JAKARTA (JP): Indonesia's central bank will not immediately diversify its external reserves to include the new euro currency and reduce U.S. dollar holdings, according to Bank Indonesia (BI) director Miranda Goeltom.

Miranda said on Monday that although the value of the euro had the potential to strengthen against the dollar, BI would make extensive calculations before including the euro in its reserves.

"We will not simply follow the prevailing views. Our reserves management policy is not to speculate, but to help maintain the exchange rate and foreign exchange reserves," she told reporters at a press conference.

She added that the central bank would hold only enough euro for hedging purposes.

She did not disclose government liabilities denominated in the legacy currencies (the currencies of the 11 nations joining the euro) or the makeup of the central bank's external reserves.

The new euro currency was adopted by 11 European nations as their single currency on Jan. 1.

Reports said that Asian central banks, which hold about 40 percent of the world's reserves, are expected to diversify their reserves to include the euro and trim their U.S. dollar holdings because regional currencies pegged to the greenback had been badly hurt during the current 18-month financial crisis.

Miranda said that there was a huge potential demand for the euro because it would likely become an invoicing currency that could contend with the domination of the U.S. dollar.

"However, during the transitional period there will be uncertainty," she added.

She said that there were still many questions about claims that the euro could rival the U.S. dollar as the primary global currency.

She pointed out that the euro had to meet several criteria, including acceptability, liquidity and stability, before it could become the primary global currency.

"It has yet to be seen (if it can answer these questions)," she said, adding that the euro also had to prove that it could serve as the world's unit of account, store of value and means of payment.

"The European Central Bank must also prove its credibility and reputation," she added.

Miranda said that the euro would not have as much impact as the yen in affecting the value of the rupiah because Japan's role in the country's economy was greater than that of the European Union.

"The impact of the euro on the rupiah and other ASEAN (the Association of Southeast Asian Nations) currencies will depend on the contribution of the EMU (European Monetary Union) to ASEAN economies both in terms of trade and financial inflow," she said.

"Japan's role is still much greater," she added.

She said that the exchange rate of the rupiah against the euro would be set based on the rate of the U.S. dollar against the euro through a cross rate mechanism in order to prevent arbitrage transactions.

She said that in addition to the exchange rate of the euro against the rupiah, BI would continue to announce its exchange rates on major European currencies.

She added that the central bank would continue to accept the currencies of the nations that have joined the euro until the year 2002 when the euro bank notes are printed.

BI announced on Monday that its export draft exchange rate for the euro was set at Rp 9,479/Rp 9,482.

"But there were not any transactions," Miranda said.

The euro debuted on the foreign exchange market on Monday, ending sharply higher against the U.S. dollar.

The euro rose to an intraday high of 1.1885 against the dollar in Singapore trading before German banks sold the new currency.

It closed Asian trading in Singapore at 1.1805 against the dollar, up from the 1.16675 level set on Thursday on the eve of its official Jan. 1 launch, according to rates quoted by Banque Nationale de Paris in Singapore. (rei)