Thursday, July 7, 2011

UBS: US Dollar still remains the World’s main Reserve Currency

Analysts at UBS believe that although many of the largest market participants such as Asian central banks tend to diversify their assets from holding US dollars, the greenback will for some time more remain the major reserve currency.

According to the COFER (Composition of Foreign Exchange Reserves) report released by the IMF, in the first quarter of 2011 reserves denominated in US dollars decreased by 0.8%, while the holdings in euro trimmed by 5.1%. The single currency was sold probably because of the concerns about the situation in the peripheral euro zone nations, while dollar got under pressure due to the fears about the extension of quantitative easing.

UBS underlines that other currencies such as commodity ones tend to attract increasing demand as the reserve ones.

As for the longer term, US currency risks to lose its status. The bank asked the participants of its annual reserve management seminar what would be the most important reserve currency in 25 years. The majority of respondents think it will be not one, but a portfolio of currencies, 5% of the interviewed said it would be euro, while less than 30% think that dollar will manage to keep the lead.

The bank notes that if the reserve managers add fiscal performance on the list of criteria for investment selection that currently includes yields and liquidity, emerging markets’ currencies will be able to compete with the ones of advanced nations.

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