EU Draft Says `Abrupt Shift
An “abrupt shift'' by state investment funds into euro-denominated assets could fuel gains in the currency, according to a draft European Commission paper.
“While an increased international use of the euro would definitely bring benefits, an abrupt shift towards the European currency'' by sovereign wealth funds “could put unwelcome upward pressure on the euro and should be avoided,'' according to the draft paper obtained by Bloomberg News. The final paper will be presented to European finance ministers next month.
Against the currencies of the euro region's 24 biggest trading partners, the euro has strengthened 5.8 percent in the past year, hurting the competitiveness of the exports that drove economic growth since 2006. Europe posted its first trade deficit in more than a year in December as the euro's gains and slowing global growth curbed shipments abroad.
Governments, which use sovereign wealth funds to invest windfall revenues in foreign equities and other assets, have increased their holdings of the euro recently. The dollar's share of global foreign-exchange reserves fell to a record low in the third quarter as demand for U.S. assets waned after the collapse of the country's subprime-mortgage market.
The dollar accounted for 63.8 percent of reserves at the end of September, down from 65 percent three months earlier, according to International Monetary Fund data. The euro's share rose to 26.4 percent from 25.5 percent. IMF quarterly figures go back to 1999, the year the euro was introduced.
Other Currencies
Sovereign wealth funds, or SWFs, will quadruple in size to $7.9 trillion by 2011 from $1.9 trillion last year, according to Merrill Lynch & Co. In an October report, Merrill said the flood of cash may put pressure on the dollar as central banks diversify their reserves into other currencies fast cash advance cash advance usa.
“The rise of SWFs illustrates the seriousness of current- account imbalances in the global economy that have their origin in the managed exchange rates operated by some of the countries in surplus,'' according to the draft document. “SWF owners need to show that they are not holding back appreciation in their currencies to accumulate more foreign assets for their SWFs.''
European officials have complained that China should let its currency appreciate more quickly to help cut the Asian nation's widening trade surplus, which grew 23 percent with the euro area in the first 11 months of 2007. While the yuan has climbed more than 15 percent against the dollar since a decade- long peg was abandoned in 2005, the Chinese currency has fallen about 6 percent against the euro over the same period.
Commission Document
The commission document outlines risks from the growth in sovereign wealth funds as European officials seek a coordinated approach to monitoring them. The commission, the 27-nation European Union's executive body in Brussels, is scheduled to adopt the paper on Feb. 27.
According to the paper, which will be discussed by European finance ministers and heads of state at meetings next month, “a more specific concern'' about the investment funds “relates to the opacity of their functioning and their possible use as an instrument to gain strategic control'' of foreign companies. “Business and investment decisions could be influenced in the political interest of the SWFs owners.''
Policy makers including European Central Bank President Jean-Claude Trichet have called for guidelines so that the funds operate transparently to avoid roiling financial markets.
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