Central Banks Broadening Range Of Foreign Reserves

Central Banks Broadening Range Of Foreign Reserves

By Stephen L. Bernard
Of DOW JONES NEWSWIRES

* MARCH 31, 2011, 4:07 P.M. ET

NEW YORK (Dow Jones)--Central banks added to their dollar reserves during the final quarter of 2010, but at a much slower pace than they added reserves in smaller currencies.

Foreign central banks held $3.144 trillion in dollars, among foreign reserve holdings data that break down holdings by currency. That's a 2.6% increase from the prior quarter, according to International Monetary Fund's Currency Composition of Official Foreign Exchange Reserves, or Cofer.

However, reserves accumulated outside of five of the world's biggest currencies is increasing at a much faster pace. Money going into "other" currencies, which does not include the dollar, euro, yen, Swiss franc or U.K. pound, jumped 11.9% to about $224.45 billion. It's a small figure, but indicates that there is some more diversity among new reserves being added by central banks.

"Diversification does not mean just dollar into euros, but others as well" at least on the margin, said Jeffrey Young, head of North American FX research at Barclays Capital in New York.

The growth in the "other" category is indicative of where money is flowing in the currency market. The category includes currencies like the Australian and Canadian dollars and Swedish krona, which have been boosted by their spot at the fore for the global economic recovery.

"It's symptomatic of a broader shift to look outside the mainstream," said Alan Ruskin, global head of G10 foreign exchange strategy at Deutsche Bank in New York.

Overall, central banks held $9.258 trillion in reserves at the end of 2010, a 3% increase from the third quarter of last year. The IMF's data, which comes from 139 countries, included $5.12 trillion in "allocated" reserves, or money broken down by currency. The rest of the reserves are listed as unallocated.

China, which is one of the world's biggest holder of reserves, does not break out the size of its holdings by individual currencies, so its sizeable holdings are listed as unallocated.

The dollar accounted for 61.4% of total allocated reserves, slightly higher than the 61.3% during the third quarter of 2010. "Other" currency allocation increased to 4.4% from 4.0%.

Euro holdings as a percentage of allocated reserves fell to 26.3% in the fourth quarter from 26.9% the previous quarter.

Stripping out price changes, the share of reserves being accumulated in dollars during the fourth quarter was largely in line with historical averages, despite a spate of dollar-negative headlines throughout the fourth quarter of 2010, Young said.

During the fourth quarter, the Federal Reserve launched its controversial bond purchase program, which hurt the dollar and had some central bankers complaining about the policy.

Central banks form the backbone of the currencies markets. Their slow and steady shifts out of the dollars they generally receive from trade or commodities exports, and into other currencies, play a big role in determining exchange rates.

Because they invest for the long term, they seek stable, robust currencies and typically tweak their holdings at a glacial pace.

The amount of reserves held in U.K. pounds decreased to 3.96% from 4.03% among allocated reserves. Swiss franc reserves remained steady at 0.11%, while allocated reserves in Japan's yen rose to 3.8% from 3.6%.

[You must be registered and logged in to see this link.]