Euro's reserve status at risk as central banks dump holdings

LONDON (Bloomberg) - Quantitative easing may be helping Europe achieve its economic targets, but it's also undermining the long-term viability of the euro by tarnishing its allure as a global reserve currency.

Central banks cut their euro holdings by the most on record last year in anticipation of losses tied to unprecedented stimulus. The euro now accounts for just 22 per cent of worldwide reserves, down from 28 per cent before the region's debt crisis five years ago, while dollar and yen holdings have both climbed, the latest data from the International Monetary Fund show.

"As a reserve currency, the euro is falling apart," said Daniel Fermon, a strategist at Societe Generale in Paris. "As long as you have full quantitative easing, there's no need to invest. The problem for the moment is we don't see a floor for the currency. Money's flowing out."

European Central Bank President Mario Draghi has in the past welcomed the drop-off in reserve managers' holdings because a weaker exchange rate makes the continent more competitive. Yet firms warn the currency's waning popularity reflects a more lasting loss of confidence in an economy that shrank in two of the past three years.

The decline in euro reserves suggests other central banks consider the ECB's 1.1 trillion euros of QE bond purchases, which started a month ago, to be the biggest threat to the currency's global status since its 1999 debut.

Greece's debt woes aren't helping, either. The ECB ramped up the emergency funding available to Greek banks Thursday to alleviate the country's worsening liquidity issues amid drawn- out negotiations over its bailout.

All this is prompting banks from Citigroup, the world's biggest foreign-exchange trader, to Goldman Sachs to predict the euro will fall below parity with the dollar this year, from a 12-year low of US$1.0458 last month and US$1.0675 Friday.

National Australia Bank Ltd. estimates reserve managers sold at least US$100 billion-worth of euros in the fourth quarter of 2014.

"Most of the fall in the euro share represented outright selling of euros" rather than simply reflecting declines in the exchange rate, said Ray Attrill, the bank's global co-head of currency strategy in Sydney.

Of the US$6.1 trillion of reserves for which central banks specify a currency, the proportion of euros fell in every quarter of 2014, IMF data show. Last year was also the first time euro holdings fell in cash terms.

Yen holdings increased in three of the four quarters and make up 4 per cent of the total, up from as low as 2.8 per cent in early 2009. US dollars account for the biggest proportion at 63 per cent after reserve managers increased their holdings in the final six months of last year. That's down from as much as 73 per cent in 2001.