This Euro Prop May Not Hold Up

The euro's status as a reserve currency has provided key support. But it may not be as deep as it seems.

It may be slipping now, but even at current levels, the euro is looking more than resilient, given the many problems in the euro zone.

Alan Ruskin, global head of G10 FX strategy at Deutsche Bank , has been arguing that foreign central banks' holdings of the single currency have been key to that strength. By his calculations, Ruskin says the shift in euro holdings is "not that dissimilar to the growth in U.S. dollar reserves at 11.2%, the growth in British pound reserves at 9.2% and even the growth in 'other' currency" reserves.

But Ruskin also says that a shift in central bank holdings would have a big impact on the euro. And when he looks into which countries have been adding to their euro stockpiles, the news is not great for the single currency.

"Using the Swiss National Bank data, it is estimated that the Swiss National Bank accounted for 35% of the overall allocated euro reserve growth last year," he wrote in a note to clients. "We know that this reserve asset growth to offset euro weakness was hardly a vote of confidence in the euro," since the Swiss National Bank has made it clear for months that it is prepared to buy euros to maintain its desired peg for the Swiss franc.

It's not only the euro that has this problem. Ruskin notes that most of the growth in dollar reserves last year came from the Bank of Japan. "Japan historically holds most of its reserves in U.S. dollars," he says, and "Japan's dollar reserve growth is not a sign of confidence in the dollar."

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