Dollar reaches breaking point as banks shift reserves

Written by Bloomberg | Updated: Oct 14 2009, 04:24am hrs
Central banks flush with record reserves are increasingly snubbing dollars in favour of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63% of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. Thats the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesnt drive away the nations creditors. The diversification signals that the currency wont rebound anytime soon after losing 10.3% on a trade-weighted basis the past six months, the biggest drop since 1991.

Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it, said Steven Englander, a former Federal Reserve researcher who is now the chief US currency strategist at Barclays in New York. It looks like they are really backing away from the dollar.

The dollars 37% share of new reserves fell from about a 63% average since 1999. Englander concluded in a report that the trend accelerated in the third quarter.

Americas currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009 ended September 30.

Intercontinental Exchange Incs Dollar Index, which tracks the currencys performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell to 75.77 last week, the lowest level since August 2008 and down from the high this year of 89.624 on March 4. The index, at 76.431 today, is within six points of its record low reached in March 2008.

Foreign companies and officials are starting to say their economies are getting hurt because of the dollars weakness.

Yukitoshi Funo, executive vice president of Toyota City, Japan-based Toyota Motor Corp, the nations biggest automaker, called the yens strength painful. Fabrice Bregier, chief operating officer of Toulouse, France-based Airbus SAS, the worlds largest commercial planemaker, said on October 8 the euros 11% rise since April was challenging.

The economies of both Japan and Europe depend on exports that get more expensive whenever the greenback slumps. European Central Bank president Jean-Claude Trichet said in Venice on October 8 that US policy makers preference for a strong dollar is extremely important in the present circumstances.

Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets, China President Hu Jintao told the Group of 20 leaders in Pittsburgh on Sept. 25, according to an English translation of his prepared remarks. China is Americas largest creditor.

Developing countries have likely sold about $30 billion for euros, yen and other currencies each month since March, according to strategists at Bank of America-Merrill Lynch.