Woolly mammoths may be on the march

Emerging market central banks are the woolly mammoths of foreign exchange. Huge, dozy, and apparently not much of a threat, they have the power to crush other investors underfoot when roused. Could they finally be waking up to the danger debt poses to the value of developed world currencies?

Until the financial crisis, the answer was a clear no. The dollar, euro, yen, sterling and the Swiss franc made up 98.2 per cent of developing world reserves made public. But by the end of March, according to the International Monetary Fund, they made up 95.6 per cent, the lowest in data going back to 1995. With emerging market reserves at $5,471bn, that amounts to $242bn not going into the main currencies (assuming China and others that keep the split of their reserves secret moved in line with those that disclose).

After the euro was created, central banks bought it at the expense of the dollar – and the dollar fell. But in the first three months of this year, while the dollar was rising, central banks put money elsewhere, including the euro and sterling, but also into smaller currencies, particularly Canadian and Australian dollars and Norwegian krone.

Reserve managers are widely thought to have moved away from the euro in May, as concerns rose about its survival. But central banks are stuck for alternatives: smaller currencies may represent more attractive economies, but they are also, well, small. The US, UK and Japan, as central banks realise all too well, are heavily in debt. The gold market is too small to absorb much in the way of reserves.

This, as Ousmene Mandeng at Ashmore, an emerging markets fund manager, points out, leaves the option of other developing countries.

Tiny chunks of reserves are beginning to be put into other emerging markets; but big shifts will not happen quickly, as central banks move at glacial speeds. If that trend ever takes off, it would stomp on the value of the dollar.