Asian Central Banks Increase Euro Holdings

While they continue to massively support the American currency, Asian central banks have also been reported as having increased their stake in the euro in recent month, according to a European Central Bank survey.

The dollar was still the preponderant worldwide choice, representing 64.5% of all central bank currency holdings at the end of 2002, a slight drop from the previous year’s 67.5% in 2001 and 2000.

The banks of China, India, Japan, Hong Kong, Mexico and Russia represented 85% of a massive increase of some $759 billion in foreign reserve currency holdings in the world from 1999, some $350 billion in 2002, to reach a world total of $2.4 trillion.

The review focuses on developments between mid-2002 and mid-2003. It confirms that the use of the euro by non-euro area residents continues to increase gradually, is most prominent in the regions neighbouring the euro area and is driven, to some extent, by the euro area itself, as euro area investors are significant purchasers of euro-denominated international bonds. In addition, the review contains a number of new findings:

It noted that the use of the euro in short-term debt market hit an all-time high during second quarter of 2003 period reaching some $84 billion or over 33.5% of the total, while the dollar fell to over 39.6% of total.

It notes for example that US and Asian interests are increasingly using the London financial centre for their “entry point” in euro-denominated activities.

Turning to the demand side, a new development over the review period is the rising interest of Asian investors in euro-denominated bond issues, which is documented by converging evidence gained from the specialist press and interviews with market participants. In Japan, there seems to be increasing interest from commercial banks and, in other Asian countries outside Japan, from central banks too. Indeed, in the first half of 2003, the frequency of Asian investors’ participation in primary market issues of euro-denominated bonds by non-euro area residents doubled to 30% compared with 1999-2001. According to market participants, interest was especially strong for high quality issues, and was perhaps driven by considerations concerning the diversification of reserve holdings and/or with a view to benefiting from the appreciation of the euro.

It also notes that Japan, one of the few countries which publishes breakdowns of its foreign currency market interventions, intervened heavily in the dollar but only some 2.5% in euro markets.

Questions of monetary and exchange rate management, including relationships with Asian countries as well as the American dollar, have emerged as major policy issues in recent months, especially in the context of the largely unexpected rise in the value of the euro in relation to the dollar. This significant change of some 30% in the course of a year has been regarded as a largely negative effect on the export competitiveness of EU industries and a drag on the prospects for economic growth in the euro zone. The appearance of inaction by the European Central Bank to adopt a reactive policy in the face of this phenomenon has drawn some sharp criticism in the some political and editorial circles in Europe. Other evaluations have tended to mitigate the extent of the real impact on trade and economic performance and underlined the benefits on stability and internal trade.

Nevertheless, numerous EU firms and industries, including such prominent groups as Airbus and its parent EADS, have signalled they visualised establishing production lines outside the euro zone in America or Asia and monetary questions have begun to figure regularly and prominent in EU contacts with Asia, especially China and Japan. At the recent EU-China Summit in Beijing, for example, there were discussions regarding the continued policy of Chinese authorities to maintain the peg of the yuan vis-à-vis the dollar despite the decline of the American currency by intervening massively in money market to keep the yuan from rising, and ongoing discussions on the amount of its massive foreign currency reserves the Chinese Central Bank would keep in euros (See related Article on EU-China Summit). In contacts with Japan such discussions have also centered on Tokyo’s interventions on money markets to keep the yen relatively weak. The result in the eyes of some European analysts have to emphasise the competitiveness of such Asian exports to the detriment of European competitiveness leading to large balance of trade deficits for the EU with China and Japan.

On another level, there were reports in January of quiet consultations between the EU and Japan with a view toward exercising joint influence on the US to act to restrain the decline of the dollar value at a forthcoming meeting of G8 industrialised country Finance Ministers in Florida in February. However, Japanese Finance Minister Sadakazu Tanigaki in January said that coordinated intervention with U.S. or European monetary authorities will be difficult and "not always possible."