The dollar comprised 63.8% of reserves at the end of September 2007, down from 65% at the end of June 2007, the IMF said. Meanwhile, the euro's slice of the reserve pie increased during the same period to 26.4% from 25.5%. The British pound's portion rose to 4.7% from 4.6%.
Dollar doldrums
Analyst C. Leonard Bauer, formerly of Prudential, said a constellation of factors is prompting governments to reduce dollar-based foreign exchange reserves, chief of which is the dollar's decline versus the euro, pound, and other major currencies.
"At the core, it's a financial or purchasing power issue," Bauer. "Nations holding large dollar reserves have been stung by the dollar's decline. These nations have seen big declines in what those dollars can buy in international markets, so it's only logical that there would be some reduction in dollar holdings."
The euro, which traded Friday afternoon at $1.4708, is up about 13% vs. the dollar this year, and about 21% since January 2006. The British pound, which traded at about $1.9916, is up 2% vs. the dollar this year, and 11% since January 2006.
Euro's introduction
A second factor, Bauer said, has less to do with the dollar than with the creation of the euro. The euro, and equally important, the success of an integrated, common standards, euro-zone market, has created a second "semi-reserve currency" for nations - - another hard-currency unit of account, store of value, and medium of exchange.
"Nations now have a widely-circulated, hard-currency option with the euro, even more so than they had before with the [British] pound and Swiss franc," Bauer said. "Provided the ECB remains vigilant on inflation, the euro's role as a 'semi-reserve currency' will expand."
The dollar's portion of global currency reserves has declined to the aforementioned 63.8% from 71.1% in March 1999, while the euro's allocation has climbed to 26.4% from 18.1% in the same period, Bloomberg News reported.
U.S.: the golden door
However, Bauer was not willing to grant the euro the designation of "reserve currency status," which the dollar has held since World War II.
Reserve currency status, Bauer said, involves more than calculations about protecting a currency's value over time/retaining purchasing power, but questions about overall economic and political system strength, the rule of law, the government's history of seizures of wealth and/or assets, and individual rights.
"On those counts, the United States still performs fairly well. There are geopolitical concerns today, we know, and the economy appears to be in slow-growth mode, but the U.S. still has the most resilient, technologically-advanced and diverse economy in the world," Bauer said. "When you combine that with the U.S. Constitution and the productive capacity of the American people, you have a pretty good place to park your money, I'd say."
Walmart's New Health Food Push: Is It Too Hard to Swallow?
Bonds Are a 'Safe' Investment: A Big Lie Gets Even Bigger

