The Other Reason the Euro Is Falling
By: Kelley Holland | News Writer
A longtime source of euro support is drying up, this strategist says.
Long ago, back before the euro zone debt crisis, central banks around the world used to keep their currencies in check by buying U.S. government bonds. Many, especially emerging market central banks, would then turn and sell as much as half of their dollar holdings for euros - a sizable source of support for the common currency.
What a difference a year makes.
Gregory Anderson, a currency strategist at Citigroup , has looked at reserves data from a good-sized sampling of central banks, and he found, as he told clients, that "the pace of foreign official purchases of U.S. government bonds has ground to a halt." That's a dramatic change from the past ten years, when by his calculations, foreign central banks added $2.7 trillion in U.S. government bonds.
The near cessation of central bank dollar-buying has serious implications. For starters, Anderson says, "reserve accumulation works likes Fed balance sheet expansion," since demand for Treasurys keeps U.S. interest rates low. That's less than great news for the U.S. economic recovery.
In currency terms, the news is arguably worse for the euro.
Anderson believes that central banks have been spending reserves, and selling the euro against the dollar, for the last several weeks. Some of that, of course, reflects recent euro weakness. However, Anderson says, "the key point to take away is that official EURUSD demand is gone and unlikely to return anytime soon. Without it, downside pressures are much more likely to prevail."
Your move.
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