13 Feb 2006

How Asia’s reserve accumulation might affect the euro

Charles Gottlieb / Jean-Pierre Casey

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This market commentary sketches the competition between the Euro and the US Dollar in the global currency reserve market. It argues that central banks in East Asia and around the world may soon be prepared to sacrifice the liquidity edge still enjoyed by US Treasuries over the euro, if it continues to be accompanied by the risk of holding an asset whose medium-term value is severely jeopardised by enormous external imbalances. The euro is the most likely currency to benefit from this trade-off once it becomes too pronounced.