Grexit might undermine euro’s attractiveness as a reserve currency – BTMU

FXStreet (Barcelona) – With Euro share of reserves continuing to decline, Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi UFJ, explains that a Grexit ahead will undermine euro’s attractiveness as a reserve currency.

Key Quotes

“The euro’s share of total allocated reserve holdings decreased for the fifth consecutive quarter to 20.7% reaching its lowest share since the end of Q1 2002. The value of euro reserve holdings has decreased by USD264.8 billion over the last three reported quarters which accounts for the majority of the USD302.8 billion decline in the value of non-US dollar reserve holdings. According to our estimates, the decline in the value of euro reserve holdings has been entirely driven by the negative valuation impact.”

“Foreign exchange reserve holders increased purchases of euros sharply in Q1 to help partially offset the valuation impact from the weaker euro. According to our estimates, purchases of euros totaled around USD65 billion in Q1 which was the strongest quarter of purchases since Q2 2012 during the peak of the euro-zone debt crisis. On that occasion increased purchases by foreign exchange reserve holders offered support for the euro and marked a low point. The purchases of euros in Q1 were entirely driven by advanced economies reserve holders.”

“In contrast, emerging and developing economies reserve holders remain reluctant to purchase euros providing no offset to the sharp decline in the value of the euro. They even sold euros into weakness at the end of last year. As a result the euro’s share of their allocated reserves has fallen even further to just 19.6% at the end of Q1.”

“The euro-zone debt crisis and aggressive monetary easing undertaken the ECB including the introduction of negative deposit rates have likely played a role in undermining the attractiveness of the euro as a reserve currency.”

“The increased likelihood of Grexit has increased the risk that the irreversibility of the euro will be challenged. If Grexit occurs it will likely require some re-domination risk premium to be priced into euro-zone assets which would further undermine the attractiveness of the euro as a reserve currency. In that scenario foreign exchange reserve holders may be more reluctant to buy into euro weakness offering less support.”

With Euro share of reserves continuing to decline, Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi UFJ, explains that a Grexit ahead will undermine euro’s attractiveness as a reserve currency.

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