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Central banks snubbing dollar, favoring euro and yen

By Bloomberg News
October 12, 2009

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NEW YORK - Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two-quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations that report currency breakdowns put 63 percent of the new cash into euros and yen in April, May, and June, Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar, while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the US economy, as long as it doesn’t drive away creditors. The diversification signals the currency won’t rebound anytime soon, after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,’’ said Steven Englander, chief US currency strategist at Barclays. “It looks like they are really backing away from the dollar.’’

The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999.

America’s currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit of $1.4 trillion in fiscal 2009.

Foreign companies are starting to say their economies are being hurt by the weak dollar. The economies of Japan and Europe depend on exports that get more expensive whenever the greenback slumps.