NEW YORK (AFX) -- The dollar traded lower across the board Friday after Sweden's central bank said it had significantly reduced dollar holdings in its foreign-exchange reserves.
The Riksbank said it reduced dollar-denominated assets by 17%, to 20%, and boosted its euro holdings by 13%, to 50%. It also cut its holdings of the Japanese yen, which had previously been at 8%, and increased reserve holdings in Norway's krone by 10%. Sweden's currency reserves stood at around $21 billion at the end of last year.
'Many might see this as a signal of a wider trend that dollar holdings might eventually be cut,' said Naomi Fink, currency strategist at BNP Paribas. 'It did have an impact on the market, although this is not representative of how global reserve holders are going to allocate their reserves.'
'The market is much more interested in larger reserve holders,' Fink said.
In late New York trading, the euro rose 0.5% to $1.2341, while the dollar was down 0.8% at 116.58 yen. The dollar weakened 0.3% against the British pound, with one pound fetching $1.7817. The dollar also changed hands at 1.2753 Swiss francs, down 0.4%.
On the week, the dollar lost about 2% versus the euro and 1.7% versus the yen.
The euro rallied further after Russian Finance Minister Alexei Kudrin said that the dollar wasn't the absolute reserve currency and that the U.S. swelling deficit could affect its stability eventually.
'If a currency is used for different reserve purposes, reliability is needed,' Kudrin said at a press conference in Washington. 'The U.S. dollar has not been very stable in the past years.'
Dollar remains single largest reserve asset
The news from Sweden and Russia followed comments in the past month by Middle Eastern central banks that they're looking to diversify reserves away from the greenback and raise the euro's weighting. Chinese officials have also repeatedly suggested that Beijing should gradually stop buying dollar-denominated bonds.
'Reserve diversification by central banks has been a key driver of dollar weakness this year and this news further serves to reinforce the notion that the greenback may be under more structural pressure,' said Boris Schlossberg, senior currency strategist at Forex Capital Markets, in a note.
But Marc Chandler, global head of currency strategy at Brown Brothers Harriman, noted that while the Swedish announcement 'caught the market a bit wrong-footed,' it's not 'as dollar negative as initial market reaction may suggest.'
Data from the International Monetary Fund and Bank for International Settlements showed industrial countries held about 70% of their reserves in U.S. dollars. Sweden was well below that benchmark, and over time it's expected to move more into the euro orbit, Chandler said.
'There does appear to be an adjustment of reserve composition, but an orderly implementation of it need not impact prices, nor does it change the role of the dollar in the world economy. It remains the single largest reserve asset,' he said.
Bearish on dollar
'Overall, dollar sentiment remains negative, with talk of reserve reallocations, the prospects of the Fed ending its tightening cycle, and of U.S. and global structural imbalances not likely to do dollar bulls any favors in the near term,' said analysts at research firm Action Economics.
The dollar fell four sessions out of five this week as traders scaled back expectations that the Federal Reserve will continue to hike interest rates aggressively.
The greenback accelerated its downward spiral Tuesday after minutes from the Fed's latest monetary-policy meeting suggested a pause in the pattern of tightening U.S. interest rates may be in the offing. Fed policymakers are widely expected to boosting benchmark rates to 5% at their next meeting May 10.
The steady program of incremental rate hikes put in place by the Fed since June 2004 has given the dollar a very attractive rate differential against the euro and yen, which largely helped fuel the dollar's rally in 2005. The federal funds rate currently stands at 4.75%.
With no economic data to guide currency dealings to close out the week, investors are looking ahead to next week's readings on housing, consumer sentiment and a first-quarter gross domestic product estimate for further clues on the U.S. economy, BNP Paribas' Fink said.
G-7 to meet
Meanwhile, Treasury Secretary John Snow is hosting his counterparts in the Group of Seven nations on Friday. The G-7 ministers will also meet with representatives from Russia, China, Saudi Arabia and the United Arab Emirates.
There is speculation that the G-7 will emphasize the issue of global economic imbalances and pressure China to make its foreign-exchange regime more flexible, but many analysts doubt the meeting will have any bearing on the currency market.
Chinese President Hu Jintao said Thursday that China will continue efforts to advance exchange rate reform.
'We have already launched the reform of the [yuan] Chinese currency exchange rate regime, which has paid off initially. And in the future we'll continue to make efforts to improve the exchange rate regime,' Hu said.
Japan's yen, viewed as the proxy for the Chinese yuan, usually strengthens when speculation about yuan appreciation rises. This story was supplied by MarketWatch. For further information see www.marketwatch.com.
The Riksbank said it reduced dollar-denominated assets by 17%, to 20%, and boosted its euro holdings by 13%, to 50%. It also cut its holdings of the Japanese yen, which had previously been at 8%, and increased reserve holdings in Norway's krone by 10%. Sweden's currency reserves stood at around $21 billion at the end of last year.
'Many might see this as a signal of a wider trend that dollar holdings might eventually be cut,' said Naomi Fink, currency strategist at BNP Paribas. 'It did have an impact on the market, although this is not representative of how global reserve holders are going to allocate their reserves.'
'The market is much more interested in larger reserve holders,' Fink said.
In late New York trading, the euro rose 0.5% to $1.2341, while the dollar was down 0.8% at 116.58 yen. The dollar weakened 0.3% against the British pound, with one pound fetching $1.7817. The dollar also changed hands at 1.2753 Swiss francs, down 0.4%.
On the week, the dollar lost about 2% versus the euro and 1.7% versus the yen.
The euro rallied further after Russian Finance Minister Alexei Kudrin said that the dollar wasn't the absolute reserve currency and that the U.S. swelling deficit could affect its stability eventually.
'If a currency is used for different reserve purposes, reliability is needed,' Kudrin said at a press conference in Washington. 'The U.S. dollar has not been very stable in the past years.'
Dollar remains single largest reserve asset
The news from Sweden and Russia followed comments in the past month by Middle Eastern central banks that they're looking to diversify reserves away from the greenback and raise the euro's weighting. Chinese officials have also repeatedly suggested that Beijing should gradually stop buying dollar-denominated bonds.
'Reserve diversification by central banks has been a key driver of dollar weakness this year and this news further serves to reinforce the notion that the greenback may be under more structural pressure,' said Boris Schlossberg, senior currency strategist at Forex Capital Markets, in a note.
But Marc Chandler, global head of currency strategy at Brown Brothers Harriman, noted that while the Swedish announcement 'caught the market a bit wrong-footed,' it's not 'as dollar negative as initial market reaction may suggest.'
Data from the International Monetary Fund and Bank for International Settlements showed industrial countries held about 70% of their reserves in U.S. dollars. Sweden was well below that benchmark, and over time it's expected to move more into the euro orbit, Chandler said.
'There does appear to be an adjustment of reserve composition, but an orderly implementation of it need not impact prices, nor does it change the role of the dollar in the world economy. It remains the single largest reserve asset,' he said.
Bearish on dollar
'Overall, dollar sentiment remains negative, with talk of reserve reallocations, the prospects of the Fed ending its tightening cycle, and of U.S. and global structural imbalances not likely to do dollar bulls any favors in the near term,' said analysts at research firm Action Economics.
The dollar fell four sessions out of five this week as traders scaled back expectations that the Federal Reserve will continue to hike interest rates aggressively.
The greenback accelerated its downward spiral Tuesday after minutes from the Fed's latest monetary-policy meeting suggested a pause in the pattern of tightening U.S. interest rates may be in the offing. Fed policymakers are widely expected to boosting benchmark rates to 5% at their next meeting May 10.
The steady program of incremental rate hikes put in place by the Fed since June 2004 has given the dollar a very attractive rate differential against the euro and yen, which largely helped fuel the dollar's rally in 2005. The federal funds rate currently stands at 4.75%.
With no economic data to guide currency dealings to close out the week, investors are looking ahead to next week's readings on housing, consumer sentiment and a first-quarter gross domestic product estimate for further clues on the U.S. economy, BNP Paribas' Fink said.
G-7 to meet
Meanwhile, Treasury Secretary John Snow is hosting his counterparts in the Group of Seven nations on Friday. The G-7 ministers will also meet with representatives from Russia, China, Saudi Arabia and the United Arab Emirates.
There is speculation that the G-7 will emphasize the issue of global economic imbalances and pressure China to make its foreign-exchange regime more flexible, but many analysts doubt the meeting will have any bearing on the currency market.
Chinese President Hu Jintao said Thursday that China will continue efforts to advance exchange rate reform.
'We have already launched the reform of the [yuan] Chinese currency exchange rate regime, which has paid off initially. And in the future we'll continue to make efforts to improve the exchange rate regime,' Hu said.
Japan's yen, viewed as the proxy for the Chinese yuan, usually strengthens when speculation about yuan appreciation rises. This story was supplied by MarketWatch. For further information see www.marketwatch.com.