No
plan to switch to Euro
By Raffique Shah
Trinidad Express
Port
Spain
Petroleumworldtt.com
01 21 07
TRINIDAD
and Tobago already holds around 10 per cent of its
US$6.5 billion in foreign reserves in currencies
other than the US dollar, and there are no plans
to change this in the immediate future.
Central
Bank Governor Ewart Williams said that while the
Government was closely monitoring the dollar's recent
slide against the euro-dollar and other major currencies,
it would hardly risk switching more reserves to
the euro. "The euro is still a developing market
as far as currencies go," Williams told Business
Express. "We cannot risk moving around our
reserves based on the vagaries of fluctuations.
Our foreign reserves are based more on the way we
trade, and we conduct most of our trade, especially
in the oil and gas sectors, in US dollars."
Williams'
statement last Thursday came as fears rose over
the continuing decline of the US dollar, and the
repercussions for countries that hold large amounts
of their reserves in that denomination. Russia,
which holds around US$300 billion in reserves in
the USA, has channelled more of its recent earnings
into the euro market, down from 90 per cent to 80
per cent. Venezuela is said to have reallocated
around 15 per cent of its US$36 billion portfolio
into euros. And even conservative countries such
as the United Arab Emirates have switched between
eight-to-ten per cent of their reserves from the
declining US dollar. China, which overtook Japan
and now holds US$1,010 billion in reserves in the
USA (Japan's stood at US$897 billion in November),
has also spread more of its foreign earnings into
the euro and other markets. And Switzerland has
also secured more of its reserves in euros.
"We
have always held most of our reserves in US dollars,"
said Williams. "But our currency composition
is based on trade, so that we do have some in euros.
While the euro is faring well against the US dollar,
one wonders how much longer this trend will continue.
European economies have not been doing well. Their
growth rates average under two per cent and their
unemployment rates hover between six-to-ten per
cent. Unless they become more robust soon, they
will face serious problems which will impact negatively
on the value of the euro. It makes no sense, therefore,
for us to look in that direction at this stage."
The
Governor said that while US debts are worrisome,
that country's economy continues to perform well.
"Consumer patterns over the past few months,
for example, showed that Americans are spending.
As long as this trend continues, the US dollar will
hold its dominant position in the global market.
Of course, that country's huge debts are of concern
not only to us, but to the world. It's the biggest
economy, the biggest market for goods and services.
If anything goes wrong there it will adversely impact
on the global economy. This is more than likely
why even as the US sinks deeper into debt, countries
that trade with it are unlikely to do anything that
might trigger a collapse. They will not rock the
trade-boat. This is one reason why such huge foreign
reserves are kept in US dollars. And this is hardly
likely to change for many years to come."
Williams'
views are shared by world experts who see the US
dollar as the world's number-one currency. In a
Jeremy Peters article in the New York Times last
week, David Powell, a currency analyst was quoted
as saying: "There is some indication that central
banks are moving to diversify reserves, but it's
at a very slow pace. Is this the start of a massive
shift out of the dollar? I would say no." Shaun
Osbourne, a currency strategist in Canada, concurred:
"Over the next five or ten years, I don't think
there's any danger that the dollar's pre-eminence
is threatened. But in the long run, there is certainly
the risk that does happen."
Since
late 2005 there has been a steady slide of the dollar,
particularly against the British pound and the euro.
There are also signals that China may be reconsidering
all its reserves-eggs remaining in an uncertain
US-basket. Predictably, Iran, the world's fourth
largest oil producer, has expressed the wish to
be paid in euros, not dollars, for its products.
But experts do not foresee a mass exodus from the
dollar. What they see is a diversifying of portfolios
by central banks. Governor Williams thinks TT is
strategically sound in this regard, having some
of our "eggs" in euros, but the bulk in
US dollars.
Last
week, as we entered 2007, the dollar took a further
beating. By mid-week the euro traded at US$1.3272
while the pound was at US$1.972, both gaining strength.
According to Peters, the US dollar index, a measure
of the dollar's strength against a basket of currencies,
fell to 83.23 from 83.65 on the previous Friday.
I February 2002 the index stood at 120. In 2006,
the euro appreciated some 11 per cent against the
dollar and the pound 14 per cent.
But
these grim numbers are hardly likely to accelerate
any "run" on the dollar-and for good reasons.
According to Peters in the NY Times, "The dollar
is not likely to start flowing with great speed
out of central banks because foreign countries risk
devaluing their investments if they do so. Even
the slightest suggestion that a country is thinking
about swapping dollars for euros risks sending the
value of the dollar falling, and in turn hurts all
foreign investors in US securities."
Explaining
why the dollar will remain pre-eminent, Peters cites
the example of China. That country holds some US$345
billion in Treasury securities, and $700 billion
in currency holding out of an estimated $1 trillion
in currency reserves. "It is in China's best
interest not to let the dollar's value slip. Heavy
sales of the dollar could make it harder for the
People's Bank of China to manage its gradual appreciation
of the yuan against the dollar. Anything more abrupt
would make Chinese goods less competitive in the
USA and pose problems domestically for some of the
loans from its state banks. And if the dollar drops
too much, the value of China's holdings would decrease."
What
the experts seem to agree on, too, is that while
those countries that hold the bulk of their reserves
in US dollars may not be actually selling off dollars,
they are buying fewer dollar assets such as government
bonds, and more denominated in other currencies.
Clearly, while so many countries are "hooked"
on the dollar and depend on the US for selling their
goods, they are uneasy about a currency that has
lost around 30 per cent of its value in three years.
Theoretically, Trinidad and Tobago will have "lost"
around US$500 million in its reserves value over
that period. But both government and the Central
Bank believe it's safer to stay with the sliding
dollar, hoping the trend would reverse itself, rather
than risk switching to the euro or other currencies.
Countries with huge reserves in
US
dollars and securities:
China:
$1.01 trillion
Japan:
$897 billion
Russia:
$299 billion
Taiwan:
$265 billion
Korea:
$234 billion
India:
$176 billion
Singapore:
$135 billion
Hong
Kong: $133 billion
Trinidad
Express
Wednesday,
January 10th 2007
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©2006 Trinidad Express. All Rights Reserved.
