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[FTW wishes to thank GATA, the Gold Anti-Trust Action Committee, for indicating this AFP story.]
Central Banks Count the Cost
of Weak Dollar
By Agence France-Presse
Monday, January 10, 2005
In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
FRANKFURT (AFP) - The weak dollar appears to be tearing holes in the annual accounts of central banks both in Europe and elsewhere around the world, with many banks considering reducing their official holdings in the US greenback.
The German business daily Handelsblatt reported that the European Central Bank, which booked a 2003 loss of 477 million euros (625 million dollars), saw its net loss widen to at least one billion euros last year as a result of the weak dollar.
The newspaper did not reveal its sources and said that the guardian of the euro had refused to comment on the information.
But already last week, the Bundesbank had conceded that press reports were "more or less accurate" when they claimed that the German central bank's annual profit had been whittled down to next to nothing as a result of the sharp fall in the value of the dollar.
Already in 2003, the Bundesbank saw its profit fall to just 248 million euros in 2003, its lowest level in 17 years as a result of the weak dollar.
And because the Bundesbank holds vast reserves of dollars, it was compelled to make heavy writedowns against its holdings of the greenback again in 2004, the reports said.
The ECB faces the same problem. The Handelsblatt said in its Monday edition that the world's second most powerful central bank, after the US Federal Reserve (news - web sites), was compelled to make 1.6 billion euros in writedowns against its dollar holdings.
Last year, the euro rose by 16 percent against the dollar, representing an increase of more than 60 percent compared with the historic lows it posted in autumn of 2000.
In addition, the ECB's earnings have dwindled because of the low level of interest rates around the world.
Central banks earn income from interest rates as well as from its [sic] activities in gold, foreign currency and securities trading.
Handelsblatt said the low level of interest rates alone knocked around 700 million euros off the ECB's net interest income.
If the Handelsblatt figures are correct, it will be the third annual loss posted by the ECB in the first few years of its existence.
In addition to the loss in 2003, it also booked a shortfall of 247.3 million euros in 1999.
According to data compiled by the International Monetary Fund, the dollar accounted for nearly 64 percent of central banks' foreign currency reserves worldwide at the end of 2003.
But the euro's role is strengthening -- it saw its share of the world's foreign currency reserves rise from 16.3 percent at the end of 2000 to 19.7 percent at the end of 2003.
And that trend looks set to continue.
Russian central bank president Sergey Ignatiev said last month that the Bank of Russia was considering changing the composition of its gold and foreign currency reserves to reduce its dollar holdings in favour of the euro.
Chinese authorities have embarked on a similar restructuring of their foreign currency reserves, but have not provided any concrete figures.
"The euro is under-represented" in international currency reserves, considering the "economic weight of the eurozone and the growing role of the euro in international commerce," said Exane-BNP Paribas economist Emmanuel Ferry.
Nevertheless, the dollar was still a long way from losing its supremacy as the world's main international reserve currency.
Central banks in Asia and South America were unlikely to perform a U-turn in policy just because of the current weakness of the dollar.
"They are not ordinary investors. They view things very long term. The euro is still too young a currency and there are still too many uncertainties about the functioning of European institutions and the future perimeter of the eurozone," Ferry argued.
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