US assets shunned by central bankers

Problem for Bush as reserves are shifted to eurozone
Central banks are shifting reserves away from US assets and towards the eurozone in a move that looks set to deepen the Bush administration's difficulties in financing its ballooning current account deficit.
In actions likely to undermine the dollar's value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years.
The findings emerge from a survey of central bank reserve managers published today which was conducted between September and December. About 65 central banks, controlling assets worth Sl,700bn (£909bn), took part and the results showed a marked change in attitude over the past two years.
Any rebalancing of central bank reserve portfolios has serious implications for the global financial system as the US has become increasingly dependent on official flows of funds to finance its current account deficit, estimated at $650bn in 2004.
At the end of 2003, central banks held 70 per cent of their official reserves in dollar-denominated assets and central bank purchases of US securities had financed more than 80 per cent of the US current account deficit in 2003.
Any reluctance to increase exposure to dollar assets could cause the greenback to plunge on currency markets.
“The US cannot take support for the dollar for granted," said Nick Carver, one of the authors of the study conducted by Central Banking Publications, a company that specialises in reporting on central banks. "Central banks' enthusiasm for the dollar seem to be cooling off."
In a further worrying sign for the greenback, 47 per cent of 1 reserve managers surveyed said • they expected the growth of offi- | cial reserves to slow to less than ; 20 per cent over the next four j years. Between the end of 2000 \ and mid-2004, official reserves increased by 66 per cent.
Slower reserve accumulation growth implies the supply of official finance is likely to become more limited but few expect US demand to slow. The consensus among economists is that the US current account deficit will increase to $694bn in 2005.
More than 90 per cent of central bank reserve managers said the income from reserve management was "important" or "very important". In the two years since a similar survey was conducted, reserve managers had begun to seek higher returns for the money under management.
Dollar assets have become less attractive for these managers because the fall in the dollar since 2002 has reduced the yield they received and, in some cases, led to negative real returns.
Alan Greenspan, the chairman of the US Federal Reserve, warned in November that there was a limit to the willingness of foreign governments to finance the US current account deficit.

Financial Times