*NEWS*IS THIS WHY WE ARE IN A RECESSION ? (FROM JAN 05)

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*NEWS*IS THIS WHY WE ARE IN A RECESSION ? (FROM JAN 05)

 user 2008-05-11 at 12:03:26 am Views: 46
  • #19743

    Central banks shift reserves away from U.S.
    Moves seen undermining the dollar
    The survey was conducted on the guarantee of anonymity for the banks involved.

    JAN 2005 Central Banks are Shifting reserves Away from the U.S. and towards the eurozone in a move that looks set to deepen the Bush administration’s difficulties in financing its ballooning current account deficit.

    In
    actions likely to undermine the dollar’s value on currency markets,70
    percent of central bank reserve managers said they had increased their
    exposure to the euro over the past two years.The majority thought
    eurozone money and debt markets were as attractive a destination for
    investment as the U.S.

    The
    findings emerge from a survey of central bank reserve managers
    published today and conducted between September and December of last
    year. About 65 central banks, controlling assets worth $1.7 trillion,
    took part and the results showed a marked change in attitude over the
    past two years.

    Any
    rebalancing of central bank reserve portfolios has serious implications
    for the global financial system as the U.S. has become increasingly
    dependent on official flows of funds to finance its current account
    deficit, estimated at $650 billion in 2004.

    At
    the end of 2003, central banks held 70 percent of their official
    reserves in dollar- denominated assets and central bank purchases of US
    securities had financed more than 80 percent of the the US current
    account deficit in 2003.

    Any reluctance to increase exposure to dollar assets further could cause the greenback to plunge on currency markets.

    “The
    US cannot take support for the dollar for granted,” said Nick Carver,
    one of the authors of the study conducted by Central Banking
    Publications, a company that specializes in reporting on central banks.

    “Central banks’ enthusiasm for the dollar seem to be cooling off.”

    In
    a further worrying sign for the greenback, 47 percent of reserve
    managers surveyed said they expected the growth of official reserves to
    slow to less than 20 percent over the next four years. Between the end
    of 2000 and mid-2004, official reserves had increased by 66 percent.

    Slower
    reserve accumulation growth implies the supply of official finance is
    likely to become more limited but few expect the demand from the U.S.
    for finance to slow. The consensus among economists is that the U.S.
    current account deficit will increase to $694 billion in 2005.
    More
    than 90 percent of central bank reserve managers said that the income
    from reserve management was “important” or “very important”.

    In
    the two years since a similar survey was conducted, reserve managers
    had begun to seek higher returns for the money under management.

    For
    these managers, dollar assets have become less attractive because the
    fall in the dollar since 2002 has reduced the yield they received and,
    in some cases, has led to negative real returns.

    Alan
    Greenspan, the chairman of the Federal Reserve, warned in November that
    there was a limit to the willingness of foreign governments to finance
    the U.S. current account deficit.

    The survey was conducted on the guarantee of anonymity for the banks involved.The
    65 central banks that participated control 45 percent of global
    official reserves. Individually, they had up to $250 billion under
    management.