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Reserve managers flock back to USD

Figures from the US Treasury do not show any surge in buying of US assets in June but reserve managers have stepped up their USD purchases.

TIC (Treasury International Capital) data released this week show inflows into US assets were weak in June, probably a reflection of decreased eurozone capital flight after the second round of Greek elections. Indeed, eurozone investors were moderate sellers of US Treasuries in June after two consecutive months of buying.

 Eurozone investment in US fixed income

 Source: Nomura, US Treasury

However, whereas overall safe-haven inflows into the US weakened in June, the medium-term trend in safe-haven flows from the official sector – such as reserve managers – into US Treasuries is pointing to an increased USD share of new reserve accumulation globally, according to Nomura.

Jens Nordvig, global head of FX research at Nomura, says, as the financial crisis and subsequent fear of expansive monetary policy in the US led official investors to start diversifying away from USD and into other currencies such as EUR, the USD share of global reserve accumulation dropped from an average of 52% pre-2008 to 22% from 2010 to mid-2011.

However, TIC data suggest that USD share has begun to grow again as worries over the eurozone debt crisis have escalated.

 USD share of global reserve accumulation

Source: Nomura, US treasury, BIS, Bloomberg 

In the last three-month period, the USD share of global reserve accumulation has risen to 42%, according to Nomura’s calculations. Indeed, the bank says, if flows are excluded from Switzerland – which is unusually biased towards EUR instruments – the share is 58%.

“We would not be surprised to see the USD share stay permanently at an elevated level as tensions in the eurozone push investors out of EUR and into USD,” says Nordvig.

“If this trend is confirmed, and we will be following this closely, it will be hard for EURUSD to bounce meaningfully.”