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Central banks cut down dollar reserves, Goldman Sachs

By Babajide Komolafe
CENTRAL Banks ofemerging market countries have cut down their dollar reserve for the second consecutive quarter, says Goldman Sachs Group Inc.

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CBN Boss

The dollar’s share stayed below 60 per cent in the three- month period ended September 30, a level that had not been broken for five years until the second quarter, according to Goldman Sachs’s analysis of an International Monetary Fund report released Saturday.

“It is getting more and more difficult to dismiss the ongoing decline in the share of dollar reserves as temporary noise,” the London-based Goldman Sachs economist Thomas Stolper wrote in a research note to clients.

“It is now increasingly likely that emerging-market central banks have indeed decided to reduce the share of dollar reserves.”

The greenback’s share represented 57.5 per cent of the reserves of developing countries in the third quarter, according to Goldman Sachs. The dollar’s share of global foreign reserves decreased to a decade low of 61.6 per cent, from 62.8 per cent in the previous quarter and 64.5 per cent a year earlier, the Washington-based IMF reported.

Developing countries including China and Russia questioned the dollar’s status as the world’s dominant reserve currency this year after the U.S. Treasury sold a record amount of debt to help the nation recover from the worst economic slump since the Great Depression.

World Bank President Robert Zoellick said in September that the dollar’s status will be challenged and shouldn’t be taken for granted.

“There is no evidence of actual selling of dollar reserves,” Stolper wrote. “However, during a quarter where the dollar declined by about 3 per cent on a broad basis, emerging- market central banks failed to offset the valuation loss as they have always done in the last five years. Instead, they only kept a relatively small part of incoming reserves in the dollar.”

The Federal Reserve’s Dollar Index, a gauge of the greenback against the most-traded currencies, lost 3.1 per cent to 74.63 during the third quarter. The gauge of the dollar has decreased 22 per cent since the end of 1999.

Global central banks increased their total foreign reserves by 4.7 per cent to $7.5 trillion as of September 30, the IMF reported. Developing countries held $4.8 trillion, or two- thirds of the total.

Currencies including the Australian and Canadian dollars benefited from the move of central banks away from the greenback, according to Goldman Sachs. The category of “other currencies” increased to 3.2 per cent, from 2.2 per cent, the New York-based bank reported, working with IMF data.

“While it is clear that the changing accumulation trends do not imply outright dollar selling, as long as overall reserves continue to grow, it is also clear that the implicit support for the dollar is becoming weaker than it would have been when dollar shares were being kept stable,” Stolper wrote.

The IMF calculated the dollar’s share of reserves based on data from central banks that report their currency allocations, which account for 59 per cent of total global reserves. Some countries, including China, the world’s largest reserve holder, don’t give currency breakdowns.


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