Europe’s dream of toppling dollar fades as Asian Tigers dump euro – Telegraph.co.uk

^{Source: Nomura/IMF}

A weaker euro may be a blessing in disguise for European industries struggling
with an overvalued exchange rate. Former French leader Charles de Gaulle
once called dollar hegemony America’s “exorbitant privilege”, but the
eurozone has learnt that reserve status can also be an exorbitant burden.

Central banks increased their holdings of eurozone bonds by an estimated $1.5
trillion in the early EMU years as China, Russia and the Middle-Eastern
petro powers invested fresh reserves in euros to diversify away from the
dollar. This pushed the euro to an all-time high of $1.60 by 2008, a level
that inflicted serious damage on the manufacturing bases of France, Italy
and Spain. It also distorted the EMU credit structure, fuelling debt booms
across Club Med.

“There was too much euro buying. It is probably a good thing if the central
banks pull back, so long as it does not go too far and lead to a buyers’
strike,” said Mr Nordvig.

^{Source: Nomura/IMF}

Asia’s trade tigers dominate global reserves, holding almost two-thirds of the
$10.8 trillion total along with commodity exporters. China holds $3.3
trillion.

Advanced central banks have increased their euro holdings over the past year,
but that is entirely due to Swiss intervention, a “one-off” anomaly, and may
have stopped already.

The broader retreat from EMU bonds has not stopped the euro rising 8pc since
July to $1.31 against the dollar. Hans Redeker, from Morgan Stanley, said
this is largely due to deleveraging by European banks, which are cutting
global exposure to meet tougher capital ratios. “It is a repatriation
effect, but it won’t last. We think the euro will fall much closer to parity
within two years,” he said.