Dollar falls to eight-year low against euro

The dollar fell to an eight-year low against European currencies yesterday as a senior Russian official said that the country might increase the proportion of its foreign exchange reserves held in euros.

The currency markets took statements by Mr Alexei Ulyukayev, first deputy chairman of the Russian central bank, as another signal to put pressure on the US currency. The Russian move was seen by some traders as a possible precursor to reserve adjustment by central banks across Asia.

The euro rose to an intra-day high of $1.3105 against the greenback, from an earlier low of $1.2978, as Mr Ulyukayev said the decline of the dollar on global markets was "a real problem".

He added: "It is unlikely that the dollar share of reserves will be reviewed. The share of euros may be reviewed, but first we need to undertake analysis."

Mr Hans Redeker, head of currency strategy at BNP Paribas, said: "The Russians are saying they don't see the potential for a rebound of the dollar."

Meanwhile, Mr Michael Hughes, chief investment officer at Baring Asset Management, predicted that sterling would rise to $2.30 within two years. Mr Hughestold a conference in London that sterling would be squeezed up by the euro zone's economic sluggishness and the US deficit.

Russia, which had a record $113.1 billion (€86.5 billion) of foreign reserves as of November 12, had some 63.8 per cent of its reserves in dollars at the end of 2003, with 19.7 per cent in euros, according to the International Monetary Fund. However, analysts believe Moscow has since increased its euro holdings to about 25-30 per cent. Analysts say Russia may seek to reduce its dollar holdings to one third of its reserves.

Mr Tony Norfield, global head of FX strategy at ABN Amro, saw Russia's move as heralding the end of the dollar's pre-eminence as the world's reserve currency.

"Although the flows from this move may be quite small, it is significant because it is chipping away at dollar support,"he said.

"Previously the idea of a currency challenging the dollar was seen as pretty far-fetched. The previously privileged position of the dollar is likely to be challenged further." - (Financial Times Service)