Central banks in emerging markets cut their holdings of euro in the second quarter of this year, according to International Monetary Fund data, a move which analysts believe has helped the single currency depreciate.
Figures released this week show that countries that report the composition of their foreign exchange reserves sold a net $40bn worth of euro in the second quarter of 2014, after adjusting for changes in exchange rates.
Emerging markets – who have accumulated large reserves to protect themselves against financial turbulence and tend to manage them more actively – cut their holdings by around $50bn. Conversely, rich economies added around $10bn, probably through automatic adjustments to keep the euro’s share in their portfolios stable, according to Citigroup strategists.
Analysts believe the move to sell large quantities of euros was in part the consequence of the European Central Bank’s decision to cut its deposit rate into negative territory last June.
“We suspect that market positioning ahead of the negative deposit rates could explain, at least in part, the euro selling in the second quarter,” said Citi’s Valentin Marinov, who thinks central bank sales of the single currency may have since accelerated.
He added: “Needless to say, more aggressive easing by the ECB in coming months, potentially including even lower deposit rates, could encourage further diversification and weigh on the euro across the board.”
The single currency has fallen some 9 per cent against the dollar since the start of May, reflecting the divergence of eurozone and US monetary policy. While the US Federal Reserve is scaling back its stimulus in response to positive economic data, the ECB is embarking on more unconventional measures in its attempt to fight economic stagnation in the eurozone,
Investors are increasingly taking the view that currency depreciation is the most effective weapon remaining to the ECB. If central banks do continue to diversify away from the euro, they could be an important force in driving down the value of the single currency.
Reserve managers account for only a small proportion of the $5tn a day global foreign exchange market and often have mandates to keep a set proportion of their holdings in certain currencies. They can be slow to change their positions – but when they do, they can have a disproportionate influence.
The IMF figures represent only part of the picture, since many big holders of reserves – crucially China – report only their total, and do not give a breakdown by currency.
Daniel Katzive, strategist at BNP Paribas, noted that countries reporting the composition of their holdings now account for just 35 per cent of total emerging market reserves, down from around 50 per cent a few years ago. He warns that this makes it hard to interpret relatively small changes in the share of certain currencies.
However, the net fall of $40bn is a sharp turnround from a rise of $60bn in the euro holdings that central banks reported in the first quarter. It also marks the resumption of a steady decline in the currency’s share in global reserves since the eurozone crisis.
“Reserve managers have become far more cautious about the outlook for the euro since 2011,” said Simon Derrick, strategist at Bank of New York Mellon. “Tellingly, that has continued even as the eurozone crisis has abated.”