Sovereign credit concerns, low interest rates reshaping world reserves

Tue Apr 23, 2013 5:48am EDT
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By Natsuko Waki

LONDON (Reuters) - After years of being also-rans, currencies from countries such as Canada, Australia, China, Brazil, Russia and Norway now have a realistic chance of breaking deeper into the $11 trillion global reserve mix.

Such a move, if it came, could encourage billions of dollars in private investment to ride along in the slipstream.

Deteriorating sovereign credit quality across industrial economies has already begun to push central bank asset managers to diversify away from the traditionally dominant U.S. dollar, euro, Japanese yen, British pound and Swiss franc.

The latest IMF report - the only official data on how reserves are managed - showed central bank holdings of currencies such as Australian and Canadian dollars jumped 25 percent to 6.1 percent at end-2012.

That's small compared with the 85 percent still held in U.S. dollars and euros. But it points to the future.

Central bank reserve diversification is being driven by two things - the near zero official interest rates in the advanced world and the series of sovereign credit rating downgrades in major economies over the past year or so.

The low interest rates drive up the cost in domestic currency terms of building a huge overseas cash piles. The downgrades simply mean traditional safe havens do not seem as safe as they were.

The United States, France and Britain have lost triple-A endorsement from at least one credit agency. The latest hit to reserve credit quality came last Friday when ratings firm Fitch became the second agency to strip Britain of its top AAA rating.   Continued...

Latvia's lats and euro banknotes and coins are seen in this illustration picture in Riga March 9, 2013. REUTERS/Ints Kalnins