Asia’s foreign exchange hit a record high in July as the region’s fast-growing economies kept attracting strong inflows amid sluggish growth in the developed world, burnishing the role of Asian central banks as key players in the currency market.
Reserves held by 11 key Asian central banks, excluding China’s, amounted to $2.861 trillion at the end of July, up 2% from $2.803 trillion at the end of June and topping the previous high hit in April, according to calculations by Dow Jones Newswires. China, holder of the world’s largest reserves, only releases reserves data on a quarterly basis, and reported $2.454 trillion in reserves at the end of June.
The jump in reserves across the region–the largest since November last year–was driven by the soaring value of euro-denominated assets and dollar purchases by Asian central banks seeking to keep a lid on their currencies. The European currency rose 6.6% against the dollar in July.
Analysts say many of these dollars were used to buy U.S. Treasurys, which are believed to make up the largest portion of Asian foreign-exchange reserves, but also European bonds.
The euro rose 50% against the dollar between 2002 and 2009. Over that period, the euro’s weighting in global reserves rose to 28% from 23%, according to International Monetary Fund data, until the Greek fiscal crisis brought about a sharp drop in euro purchases and sent the currency lower.
Recent media reports suggest some Asian countries, in particular China, are widening their focus and looking to reduce their reliance on the greenback by buying euros again, taking advantage of cheaper valuations following the euro’s slide earlier this year. But some observers remain skeptical that strong central bank demand may support the euro in coming months.
In a recent note to clients, Morgan Stanley analyst Emma Watson said the euro has received a smaller boost from recent reserve accumulation than in the past decade. That’s a sign that central banks are likely to let their euro holdings slide as a percentage of the total, reflecting lingering concerns about the euro zone’s fiscal outlook, she said.
“We do not expect that central banks will provide as much support for euros as in the past,” she said. “They have prevented the euro from depreciating more rapidly… but they are unlikely to stop its depreciation.”
On the other hand, the yen may be helped by the fact that Japanese government bonds are now relatively more attractive than in the past, Ms. Watson said, since the yields offered by the dollar, euro and yen are now closer than ever due to similar ultra-easy monetary policies.
Japan’s Ministry of Finance said Monday that China bought up Japanese securities worth $5.3 billion in June and about $20 billion in the first half of 2010, nearly five times as much yen as in the previous five years combined.
Japan’s bond market is the world’s second largest after the U.S., making it deep enough to meet strong demand from central banks. The yen accounts for just 3.1% of global reserves, well below the euro’s global weighting, according to IMF data.
By DAVID ROMAN
Tags: asian markets, Chinese economy, dow jones, european economy, financial markets, Global Economy, Global Markets, IMF, monetary
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