It makes little sense to park hard-earned foreign exchange reserves in rapidly

Graphics: Ahmed Raza Khan / Mint

Of course, there are signs that there is some diversification taking place, such as India’s purchase of 200 tonnes of gold. International Monetary Fund data shows that there is a steady fall in the proportion of dollars in official reserves over the past decade. In the “foreign custody" data, too, there are signs that the pace of increase is slackening. For instance, custody holdings went up far more in the six months between 3 December 2008 and 3 June 2009 than in the following six-month period. While they were up 9.5% in the first six months, they rose by 7.3% in the next. The numbers may understate the trend towards diversification, because we know that fund flows to emerging markets have soared in the last six months and many central banks have been buying dollars in order to keep their currencies from appreciating.

Nevertheless, the data does seem to show that diversification away from the dollar is a very slow process and US assets remain a very strong preference for foreign central banks, despite all their negative features. Ironically, while central banks are piling on to US assets, US investors have been pouring funds into emerging markets.

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