Euro’s share of global currency reserves erodes

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Euro’s share of global currency reserves erodes

International use of the euro slipped last year because of the debt crisis in Europe, while the U.S. dollar held its own as the world’s leading currency for reserves held by central banks.

Currencies not traditionally used as reserves, such as the Canadian and Australian dollars, gained in favor as those countries enjoyed steady growth and lower debt than major economies.

The European Central Bank (ECB) said Tuesday the euro’s share among currency reserves held globally by central banks fell to 23.9 percent in 2012 from 25.1 percent the previous year. The dollar’s share was little changed at 61.9 percent.

The ECB said the financial crisis in the 17-country euro zone was a factor discouraging use of the euro for reserves, which are often held in the form of government bonds. Lending across borders in the euro zone has dropped, diminishing the liquidity that reserve holders like to see. Lower liquidity means fewer buyers and sellers are readily found.

Euro zone countries have struggled with heavy levels of public debt - Greece, Portugal, Ireland and Cyprus have needed financial rescue and even large economies like Spain and Italy have worryingly high debt. Concern over that debt eased only after the ECB came up with a plan to buy government bonds issued by countries that promise to reform.

In its annual report on international use of the euro, the ECB also found there was less borrowing in euros internationally by companies because they could get lower interest rates by selling bonds denominated in U.S. dollars.

Countries hold reserves of foreign currency so they can influence their own currencies’ exchange rates if they rise or fall too rapidly. They can do this by buying or selling currencies on foreign exchange markets.

Demand for dollars in the form of U.S. Treasury bonds by other countries - such as China - helps hold down the interest rate the U.S. government pays to borrow.

A key finding of the report was that nontraditional reserve currencies such as the Canadian dollar and Australian dollar have been in greater demand because of their growing economies and better public finances. There have been concerns about government debt not only in Europe but also in the countries that issue the world’s other traditional reserves: the United States, Japan and Britain.

The category of “other’’ currencies saw its share of officially disclosed reserves increase from 5.7 percent to 6.1 percent, ahead of both the yen at 3.9 percent and the pound sterling at 4 percent.

The ECB said that category’s share is the highest since the early 1970s, when the earlier international currency system set up at the Bretton Woods conference in 1944 collapsed.

The ECB said, however, that the use of such nontraditional currencies might slow if major economies start reducing debt and deficits. Such currencies are also of limited use, the ECB said, because they are less liquid - there are fewer assets denominated in those currencies, meaning finding a seller or a buyer can difficult.

The ECB said the Chinese currency, the renminbi, had shown impressive gains in foreign trade, with the share of trade in goods settled in renminbi rising from near zero to almost 10 percent in 2012. The ECB said its widespread use as a reserve currency was hindered by China’s lack of fully developed financial markets and by its investment and foreign exchange controls. AP
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