Singapore: The fallout from the US credit crisis has given investors around the world reason to sell the dollar, but the choice for Asian central banks is not so clear-cut.
The dollar remains the dominant currency for trade and investment in Asia, while the US still has a bigger pool of liquid assets than any other market — an important factor for the central banks that have some $4 trillion (about Rs160 trillion) in foreign exchange reserves to invest.
Ga-ga over greenback: Asian central banks such as The People's Bank of China have never disclosed the breakdown of their official reserves, but analysts roughly estimate that the dollar proportion is about 70%.
In addition, Asia’s central banks are already so exposed to the dollar that any attempt to sell their US assets could backfire by putting the skids under an already weak currency and presenting them with heavy losses on their investments.
Figures showed last week that Asia’s central banks accumulated reserves in the first quarter at a rate of some $100 billion a month, not all of which is invested in dollar assets, analysts said.
“Our view is that the diversification process is occurring, but occurring relatively gradually and we don’t see any significant acceleration,” said Peter Redward, head of Asia rates research at Barclays Capital in Singapore.
Asia’s foreign exchange reserves swelled by $314.5 billion in the first quarter of 2008 to a record $4.24 trillion, led by a $154 billion jump in China’s reserves.
The accumulation reflects Asia’s efforts to slow currency appreciation to maintain export competitiveness.
“I think that so far as Asian economies continue to rely on exports as an engine of growth, they will continue to accumulate reserves,” said Thomas Lam, an economist at United Overseas Bank (UOB) in Singapore.
The dollar has slumped to a record low this year against the euro, Swiss franc and a basket of major currencies as investors fear the world’s biggest economy has slumped, or will slump, into a recession.
But as the dollar fell, US data suggests that Asian central banks may have quietly stepped up their purchases of US debt, after a sell-off in August as the US subprime crisis erupted. Some analysts said that could reflect a market view that the dollar has limited downside from current levels.
“The US has a lot of cash-generating assets and they are cheap, which make it a very attractive investment destination,” said Tim Condon, economist at ING Groep NV.
Holdings of US treasury and agency debt by foreign central banks, which largely reflect Asian central bank holdings, rose by $150 billion in the first three months of 2008 to $2.2 trillion, Federal Reserve data shows. That was more than double the rise in the fourth quarter of 2007.
The Fed did not give a geographic breakdown, but data from the US treasury department showed that holdings of treasury debt by Asian central banks climbed $35 billion between September 2007 and January.
Data from the International Monetary Fund, which covers two-thirds of the world’s foreign currency reserves, showed that the dollar made up 64% of the global central bank holdings in the fourth quarter of 2007, dwarfing the euro’s share of 26.5%.
Asian central banks have never disclosed the breakdown of their official reserves, but analysts roughly estimate that the dollar proportion is about 70%. “By and large, the US dollar is still the dominant currency in the market,” said Lam at UOB.
Reflecting falling yields on US treasuries, Asian central banks are buying more agency debt, such as those of Fannie Mae and Freddie Mac, to help boost returns, analysts said.
The premium on Fannie Mae mortgage-backed securities versus the 10-year treasury notes, which yielded 3.47%, widened to 1.7 percentage points on Friday.
The Fed has slashed its key interest rate by 300 basis points since September to 2.25%, which helped push the dollar down about 10% versus the yen so far this year and 7% down versus the euro.
After such a hefty fall, market pessimism over the dollar is easing, with some analysts suggesting the greenback’s plight could come to an end in coming months as lower interest rates help cushion the US economy.