Apr 21, 2015

    Central banks may cut US$100b in euros from FX reserves


    CENTRAL banks keen to steer clear of negative-yielding assets in a rapidly depreciating currency could cut the foreign exchange (FX) reserves they hold in euros by US$100 billion (S$134 billion) or more, analysts estimate.

    The near-year-long slide in the euro and the move below zero of many euro-zone government bond yields have driven a shift by official institutions, among the world's most conservative investors, in how they manage their US$11.6 trillion of FX reserves.

    Several analysts, mostly in conjunction with bearish forecasts on the euro, said they expect central banks' euro-denominated reserves to fall from around 22 per cent to below 20 per cent of overall holdings over the coming quarters.

    A continued decline in the euro's value against the US dollar will account for much of that, but outright selling could still run into a 12-figure sum - a significant flow out of the single currency and a major force for further weakness.

    "This shift could amount to as much as US$104 billion per year," according to estimates from Goldman Sachs.

    The latest International Monetary Fund data shows that global FX reserves fell by 3.1 per cent, or US$383 billion, in the second half of last year to US$11.6 trillion.

    Around two-thirds of that was due to valuation effects from the euro's 11.7 per cent fall in that period, according to JP Morgan. The euro's share of all reserves fell to 22.2 per cent, the lowest since 2002.

    Stephen Jen, manager of SLJ Macro hedge fund in London, reckoned that will fall by a further 2-4 percentage points in the coming quarters, equating to a reduction of about US$240 billion to US$480 billion.