Central bankers cut their euro reserve holdings to a 12-year low in the fourth quarter last year, and there may be more to come.
The shared currency’s portion of global holdings fell to 22.2 percent in the fourth quarter, the least since June 2002, data from the IMF showed on Tuesday.
The US$1.35 trillion in euros held by central banks worldwide declined from US$1.4 trillion in the third quarter.
The US dollar, with US$3.8 trillion, represented the largest percentage of the US$6.1 trillion total of allocated reserves at 62.9 percent, the most since 2009. The yen was the third-most-held currency, at 4 percent, followed by the British pound, at 3.8 percent.
“The big revaluation effect will be felt in the first quarter, when the euro’s decline is particularly precipitous — we should see the euro’s share of allocated reserves probably fall to below 20 percent,” New York-based Deutsche Bank AG global head of Group of 10 foreign exchange Alan Ruskin said in a telephone interview.
“Central banks are willing to passively allow their shares of dollar holdings to rise with the value of the dollar,” he said.
The euro followed a 4.2 percent drop in the fourth quarter with an 11 percent plunge in the first three months of this year, its biggest quarterly decline since the shared currency began trading on Jan. 1, 1999. The drop accelerated as the European Central Bank carried out unprecedented monetary stimulus.
First-quarter euro holdings likely saw a further drop after the Swiss National Bank stopped buying the common currency when it abandoned its cap on the franc on Jan. 15, Ruskin said.
Euro selling probably intensified as yields for many European sovereign bonds turned negative, diminishing their appeal, Stamford, Connecticut-based Amherst Pierpont Securities LLC strategist Robert Sinche said.
“It is not surprising that the allocation in euro-denominated assets has fallen,” he said in a note.
The US dollar has rallied against all of its major peers in the past year on speculation the US Federal Reserve is moving closer to raising interest rates.
As it climbs, central bank reserve managers are content to hold on to the US currency, New York-based Citigroup Inc global head of Group of 10 currency strategy Steven Englander said by phone yesterday.
“Rather than buy dollars and sell them in a nimble sort of way, they’ll just sit on their holdings and wait until they think the dollar’s peaked out, and then resume the diversification trade,” into other currencies, he said.
The IMF lists reserves as allocated — those whose currency composition has been identified — and unallocated. Unallocated reserves in the fourth quarter totaled US$5.5 trillion, or 47 percent of the US$11.6 trillion total.
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