China's decision to raise the ratio of euros in its huge foreign exchange portfolio, six weeks before euro notes and coins hit the streets, could spur new confidence in Europe's single currency, analysts said yesterday.
China's central bank said earlier it had been buying euros for the past two months and intended to increase the single currency's share in its $200 billion foreign exchange reserves, the second largest in the world.
The European Union accounted for 17.3 per cent of the world's exports in 2000 compared with the US's 15.7 per cent share, according to World Trade Organisation data.
Economists said Asian central banks in particular tend to be underweight euros, holding less than 5 per cent in their reserves. Over time, they could move the proportion of euros to something like 15 to 20 per cent, more in line with their trade flows. "Given that Asian central banks have $500 billion in reserves, $700 billion if you include Japan, there is potential for buying of $70 billion of euros over a long period of time," said Mr Avinash Persaud, head of research at State Street in London.
But economists said the psychological impact of any such portfolio change would be more important than the actual size of the flows in the context of the $1 trillion a day foreign exchange market. If central banks, traditionally perceived as the most cautious of investors, are ready to plough into the euro, then other private investors might follow suit, boosting a currency which has lost nearly 25 per cent of its value since launching in 1999.
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