Reserve management: No cause to fear central banks
Reserve managers are unlikely to suddenly adjust foreign currency holdings and latest IMF data suggest they will not chase the euro higher.
"Long-term data show that reserve managers historically have refrained from shifting their reserves abruptly"
The release by the IMF of the composition of foreign exchange reserves (Cofer) data for the third quarter of 2007 provides clues as to whether or not the world’s central banks are diversifying their dollar holdings. But a lot of care does need to be taken in analysing what the data actually imply. Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi, says that there is some suggestion that the euro’s failure to break above 1.50 against the dollar is because the central banks’ appetite for the single currency has waned. However, from his analysis of the IMF’s Cofer, Halpenny feels that this is not necessarily the case. "The focus of the foreign exchange market on reserve diversification has diminished somewhat recently but the data for the third quarter [of 2007] revealed that the rate of growth in foreign exchange reserve accumulation has been steadily increasing," he says.
He adds: "The record rate of annual growth in global foreign exchange reserves is 31.8%, recorded in the first quarter of 2004.