USD

1Q4 COFER Data Shows Euro Positive Bias W/FX Adjustments



By Vicki Schmelzer



NEW YORK (MNI) - While data from the International Monetary Fund

showed the U.S. dollar's share of reported foreign exchange reserves was

up slightly in the fourth quarter of 2011, adjusting for currency

fluctuations, however, paints a somewhat different picture, with the

euro share improving overall despite the negativity of the Eurozone debt

crisis, analysts said.



Steven Englander and Andrew Cox, head of G-10 currency strategy and

currency strategist at CitiFX, maintained that to get a more accurate

view of current reserve holdings, the change in currency exchange rate

needs to be factored in.



"Movements in EUR holdings, for example, reflect both EUR buying/

selling and EUR appreciation/depreciation," they said in a research

note.



This can be viewed as "valuation adjusted accumulation," they said.



"EUR denominated reserves increased about 2.6% after adjusting for

currency effects, so the reported drop in EUR reserves is entirely due

to the drop in the EUR's value over the quarter," the strategists said.



"The 2.6% gain reflected a somewhat smaller gain in EM and a larger

percentage gain in developed market country EUR holdings," they said.



The Currency Composition of Official Foreign Exchange Reserves or

(COFER) data put total world FX reserves at $10.197 trillion, up from

$10.164 trillion in Q3.



Allocated reserves totaled $5.646 trillion in Q4, up from $5.594

trillion in Q3.



Unallocated reserves, or the reserves of countries do not report

the currency composition breakdown to the IMF, were $4.551 trillion at

the end of December, versus $4.570 trillion at the end of September.



In Q4, 62.1% of allocated reserves were in dollars and 25.0% were

in euros, compared to 61.8% and 25.7% in Q3 and 61.8% and 26.0% at the

end of Q4 2010.



The "other currency" (i.e. not yen, sterling or Swiss franc)

component, continued to edge higher in Q4, i.e. at 5.1% of total

allocated reserves, versus 4.8% in Q3 and 4.4% at the end of 2010.



The IMF used an dollar-euro rate of 0.7406 for Q3 and 0.7729 in

calculating the Q4 COFER breakdown, which translates into roughly

$1.3503 and $1.2938 respectively.



The euro closed September 30 at $1.3384 after trading in a $1.3381

to $1.3602 range and closed December 31 at $1.2945, after trading in a

$1.2902 to $1.2998 -- as per Reuters FX rates.



The COFER data does not offer insight into what China, with its

$3.2 trillion in currency reserves. China does not report the breakdown

of its reserve assets.



In January, Li Lianzhong, head of economics research at the

Communist Party's Central Committee's Policy Research Office, told a

forum in Beijing that 75% of the country's foreign exchange holdings are

in dollars.



"U.S. debt plus the U.S. dollar accounts for 75% of our foreign

exchange reserves," he said at the time.



Euros are thought to account for another 20% or so, with the

remainder made up of yen plus currencies such as sterling, Aussie, and

the Korean won.



Offering an alternative take, FX strategists at Standard Chartered

maintained in an early March research report that China had 55% of its

total reserve holdings in U.S. instruments at the end of 2011, down from

a peak of 71% in March 2009.



Pointing to revised TICS data, evidence is mounting that Chinese

demand for U.S. assets has been waning, they said.



"In 2011, we estimate that only 34% of China's new FX reserves went

into U.S. dollar assets, compared with 83% in 2010," the strategists

said.



Going forward, China is unlikely to keep buying dollars at the same

pace as in the past for three main reasons, Beat Siegenthaler, currency

strategist at UBS, said in a research note Monday.



First, "capital outflows are increasingly becoming an issue" and

second, "FX liberalization has move up the political agenda, resulting

in less interventions," he said.



Finally, "the ongoing internationalization of the renmimbi" will

likely "blur the picture" in terms of the direction of capital account

flows," Siegenthaler said.



China is not the only country looking to diversify its assets; so

is South Korea.



In its 2011 annual report, released Friday, Bank of Korea noted

that the country's foreign exchange reserves rose by $14.831 billion to

$306,402 billion as per the end of 2011 from end 2010.



Of the total, $298.2 billion was in foreign accounts, up $11.3

billion from 2010 levels.

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Ashraf